Pearson slips on Deutsche note and downbeat earnings from US peer

Education publisher Pearson was on the back foot on Wednesday after Deutsche Bank cut its price target on the stock to 770p from 950p.

It said Pearson is trading on 13x price-to-earnings 2016E and 15x price to free cash flow, which could appear low compared to peers, but Pearson is experiencing organic revenue decline and has not grown more than 1% since 2010.

“With risk of further weak trading in college, low adoption year in school books and the possibility of a significant round of restructuring in 2016, we retain our sell,” said DB.

The bank said Pearson’s problems are structural, with cyclical pressures exacerbating them.

The challenges are most acute in US College, which accounts for around 35% profits, and where a reduction in margin to the level of the school business would negatively impact profits by 15%.

Over time, DB reckons the education market is becoming more competitive, as the old print-based oligopolies are challenged by free content and new entrants.

In addition, a downgrade to full year guidance by US peer John Wiley & Sons also weighed on the stock.

John Wiley fell more than 10% after its second-quarter results. The publisher said revenue dropped 9%, pushing net income down by 19%.

At 1356 GMT, Pearson shares were down 2.5% to 745p.