Pearson (PSO, Financial) is a global media conglomerate. It publishes respected newspapers, prestigious academic works and all kind of paperbacks, under brand names that include the Financial Times, Pitman Publishing and Churchill Livingstone. It also has 47% of Penguin Random House, the world’s largest consumer book publisher.
As you can see, Pearson holds a leading position in the publishing world. And, a few decades ago, this statement would have said plenty about the company. But as we all know, the book and printed-newspaper market is shrinking, and there is little hope for those who rely exclusively on this business. Pearson is well aware of the matter and is smoothly transitioning form being a traditional publisher to becoming an educational services provider. This business probably explains why the company has a P/E ratio of 32.7x, quite above the industry median of 17.3x. The firm is becoming increasingly important the U.S. and the international education markets. But, is it time to buy and hold its stock?
New Investments
To offset the decline in the textbook market, Pearson is staying ahead with new projects. The company’s operating margin is 10.20%, a much higher number than the Global Publishing Industry’s median of 6.07%. This enables it to foster the education area.
But also, its margins allow it to develop new technologies, which leads us to think that Pearson will maintain a competitive advantage on the transition to the digital era. The firm is building up its education business in India, thru Avanti Learning Centers and the divestiture of Mergermarket (a financial news and analysis provider). It is also creating proprietary education products such as MyLab, a digital learning, homework and assessment online program that complements textbooks.
Pearson and the U.S. Education Market
Pearson has significant operations in the U.S., where it generates about 60% of its overall sales. The firm holds a prominent position in the U.S. K-12 education market. It is also the largest publisher of textbooks and related course materials for U.S. colleges and universities. This provides it with a small economic moat when it comes to school textbooks.
To qualify for state funding, however, half of the states must buy educational materials that have been approved at state level (adoption cycles occur every five years). Since a single educational program made to compete for national adoption can cost hundreds of millions of dollars, only the three largest U.S. publishers have the strength to effectively enter the contest.
It’s important to keep in mind, however, that the relative importance of state funding does carry some risks. State funding always depends on the government policies and might be adversely affected by budget shortfalls.Â
A History
Pearson has a long track record of returning capital to shareholders through dividends. The company now has an ROC of 108%, quite an impressive number, and pays out about 2.3% of the current stock price in the form of dividends. And it’s a safe assumption to say this won’t change any time soon. Pearson shows a strong commitment with its international education strategy and the new digital projects. This will certainly help growth.
However, when Pearson´s valuation and profitability are compared with its largest competitors’, Thomson Reuters Corporation (TRI, Financial) and Reed Elsevier PLC ADR (RUK, Financial), its stock does not look so attractive:
| Ă‚ | Pearson | Thomson Reuters | Reed Elsevier |
| P/E (ttm) | 32.7 | 36.6 | 9.9 |
| Operating Margin (%) | 10.2 | 20.0 | 21.8 |
| Net Margin (%) | 6.4 | 15.6 | 17.5 |
| ROE (%) | 5.7 | 12.1 | 46.9 |
| Avg. EPS Growth Next 5 Years (per annum) | 4.4% | 5.7% | 6.6% |
Sources: GuruFocus.com/Yahoo! Finance.
So, as you may notice, both Thomson Reuters and Reed Elsevier offer better profitability figures and growth projections. In addition, Reed Elsevier’s valuation makes it substantially more alluring for investors. It seems like this time, following Jim Simons (who has been selling Pearson’s stock lately) and his mathematical investment formulas might be like the best option. Instead, I would trail Louis Navellier and Arrowstreet Capital (Peter Rathjens, Bruce Clarke and John Campbell), both of which added Reed Elsevier’s stock to their portfolios over the past quarter.
Ă‚
Disclosure: Victor Selva holds no position in any stocks mentioned.
