Liberum slashes Pearson price target after profit warning

Liberum slashed its price target on education publisher Pearson to 360p from 470p following the company’s profit warning in the previous session.

The brokerage said Pearson remains its key ‘sell’ in the media sector, as it has been for several years, with the profit warning on Wednesday demonstrating why. It pointed out that the company has finally admitted that its US higher education business is facing significant structural pressures.

Liberum, which expects Pearson to issue another profit warning in 2017, said its FY17 earnings per share estimate of 45.3p is below guidance of 48.5p to 55.5p as it reckons rental may have reached a tipping point where its effects accelerate and Pearson cannot adjust for them.

The brokerage said Pearson faces a “double whammy”, i.e. earnings downgrades and a de-rating as the market recognises that it has structural issues in its business.

“We do not see an end to the pain in Pearson's US higher education business as students switch to cheaper options (such as rentals).”

At 1052 GMT, the shares were up 2.1% to 584.75, bouncing back from heavy falls in the previous session.