Liberum says Pearson's self-help efforts 'too little, too late'
Liberum said Pearson's major profit warning and accelerated plans to recover from the US higher education challenges to protect the dividend were "too little, too late".
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The FTSE 100-listed company said it intended to exit from its 47% stake in Penguin Random House to beef up its balance sheet, announced it is expanding its US higher education rental offering and, "for the first time", Liberum said, explicitly recognised the structural problems in their US higher education market.
Pearson said it still expected to make £630 adjusted operating profits, but for 2017 guidance for adjusted EPS was slashed to 48.5p-55.5p, far below consensus 63.5p.
The broker felt the "key point" was that US higher education courseware fell 30% yoy in the fourth quarter and 18% for full year, estimating US higher ed is roughly 45% of profits.
"Our main area of concern has always been PSON’s US Higher Education business and that students were no longer paying for expensive textbooks and moving to cheaper options, particularly book rentals," analysts wrote.
"This has now proven to be the case (despite Pearson citing inventory issues, which may be another way of explaining the problem) but it has taken PSON management several years to publicly accept the impact.
Analyst Ian Whittaker said reducing e-book rental prices by 50% might not be enough to take share and, as has been seen in the music industry, "there is a question of association for students between the publishers’ title and the book they want to buy", while the new rental plan may put Pearson at odds with their important bookseller customers.
With the monetisation of PRH leading to significant earnings dilution, Liberum's 'sell' rating and 470p target price since last year were looking ever more prescient.