Pearson rallies on Exane upgrade

Educational publisher Pearson rallied after Exane BNP Paribas upgraded the stock to ‘outperform’ from ‘neutral’.

“Risks of further earnings downgrades are real but seem discounted by an all-time low valuation. We are hopeful the new chairman will lead a profound refocussing of the group with better capital allocation. Cyclical and structural headwinds should ease from 2017,” the bank said.

Exane said Sydney Taurel brings with him a wealth of experience that will certainly please shareholders.

His immediate task will be to restore credibility after the stock’s 45% plunge in the last six months and Exane is hopeful of seeing positive developments.

The bank said Pearson’s recent commercial performance is mixed and it sees no relief in 2016.

The bank is below the earnings per share consensus by 5% on 2016e and 7% on 2017e but said further consensus downgrades already seem discounted in the share price.

It added that headwinds should abate in 2017 as the education policy reforms ease, US enrolment benefits from the move to free college tuition and with positive structural drivers continuing to offset the negative pressure.

It pointed out that the stock is on all-time relative lows at 11x 2016 price-to-earnings and a 7% yield.

“On our bear case scenario, the stock would trade on 13.5x P/E 16e and a 3.7% yield. Could it be the end of the world for Pearson and not for its peers? We think not and turn buyers in anticipation of a profound refocusing, a stable dividend and a return to growth in 2017. Applying peer sales multiples yields 50% upside.”

At 0930 GMT, Pearson shares were up 4% to 735.50p.