Exane downgrades Pearson to 'neutral'

Exane BNP Paribas downgraded Pearson to ‘’neutral’ from ‘outperform’ and cut the price target to 1,000p.

The bank said its investment case on Pearson was predicated on three main ideas.

It argued that cyclical headwinds, especially in US Higher Education, would abate from 2015 onwards and reckoned the transformation of the group towards digital and emerging markets would further help accelerate top line growth while operating efficiency gains would drive margin expansion.

“We were wrong,” said Exane.

“We concede that it will take the group much longer to see the benefits of the hoped-for cyclical and structural turnaround. We also believe that capital allocation issues are likely to further put pressure on the shares in the near term. We do not see significant upside in the share in the short term.”

At the same time, Exane reiterated its ‘buy’ rating on RELX, formerly known as Reed Elsevier.

It said capital allocation policies are supportive for RELX but a negative for Pearson. Exane said that RELX has shareholder support to deploy capital for buybacks, bolt-on and even well-priced large acquisitions in Risk.

“Capital allocation looks like an issue for Pearson at a time when large acquisitions are needed but management credibility is in doubt.”

At 0930 BST, Pearson shares were down 5.5% at 898.26p while RELX was up 1.2% at 1,171p.