Pearson given low grade by Morgan Stanley on education angst

A note on the media and internet sector from Morgan Stanley weighed on Pearson shares on Tuesday, as the educational publisher was downgraded among a largely positive stance on its peers.

After the sector outperformed in the first half of the year, Morgan Stanley's analysts moved RELX, the former Reed Elsevier, back to 'overweight' from 'equalweight' based on its improving revenue growth and margins receiving more appreciation in a cautious market environment, and said it also favoured ITV, Publicis and UBM.

However, Pearson was downgraded to 'equalweight' from 'overweight' on the back of contract losses in US assessment - with the risk of more losses to come - and sluggish US higher education enrolments.

Morgan Stanley sees earnings revisions turning negative again and has trimmed its 2015 EPS forecast by 7% to 74.4p.

"The cyclical upturn in 2016 now looks weaker," the investment bank added, with the continued fall in unemployment in the US, together with a further clampdown on for-profit colleges, suggests that student enrollment will still be on a downtrend going into 2016, which will weigh on the hoped-for upturn in the US assessment business.

Moreover, when new Pearson chief financial officer Coram Williams takes up his post in September, the unexpected difficulties faced by the US assessment arm could provide "incentive for him to consolidate earnings expectations conservatively rather than push them forward".

However, on a wider sector viewpoint Morgan Stanley's analysts wrote "we are positive on media", with their reasoning being based on anticipated cyclical recovery in domestic TV and outdoor advertising; strong balance sheets giving a mix of cash returns and typically EPS enhancing acquisitions; and "a frisson of corporate activity" as the market mulls the expansion plans of the likes of Liberty Global, Vodafone and Vivendi.

In cyclicals, ITV is favoured for "growth and attractive total yield", while on the quality digital portal players Morgan Stanley said it was "upbeat", with Rightmove and Auto Trader cited.

In the 'value' stocks, UBM received reiterated 'overweight' for being "an H2 story" based on management change, future of its PR Newswire arm and the events outlook in China but analysts suggested "the risk averse might prefer Informa".