Exane downgrades Pearson, sees more turbulence ahead

Exane BNP Paribas downgraded education publisher Pearson to ‘neutral’ from ‘outperform’ and cut the price target to 900p from 1,000p saying it fears more turbulence ahead.

The bank said that after last year’s shock profit warning, Pearson has needed to deliver on expectations to rebuild confidence. However, the US higher education courseware market looks weaker-than-expected despite signs of an improvement in enrolment over the summer.

“This raises the risk of a further setback at the Q3 results,” it said.

Exane cut its 2016 earnings per share estimate by 6% and its 2017 forecast by 5%, saying it was concerned consensus might have to revise 2016 forecasts lower following the third-quarter results.

In addition, it noted that US peer John Wiley & Sons pointed to a weak market in July.

Exane said its industry contacts suggest August was below expectations too and it reckons this weakness was largely caused by destocking at bookstores. It said market share gains were unlikely to be enough to offset industry weakness.

“We continue to anticipate an organic revenue growth recovery next year. The stock remains on sector and peer group relative lows and offers a sustainable dividend yield of 6.6%.

“But we have concerns on 2016 trends and believe there might be better entry points to play the expected 2017 turnaround later next year. We see more compelling ideas elsewhere in Media.”

At 0830 BST, Pearson shares were down 2.1% to 766p.