Pearson May Have Learned Its Hardest Lessons

Pearson Plc is the wayward pupil with a tendency to over-promise, who shows brief spurts of improvement only to bring home a disappointing report card bearing the words “must try harder.” The education provider and textbook publisher is in the midst of another periodic upswing, and markets appear willing to trust that the better grades are here to stay. It may deserve the benefit of the doubt this time.

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One way or the other, Pearson looks destined to occupy a place in the annals of corporate reinvention after former Chief Executive Officer John Fallon bet the ranch on turning the media conglomerate into a focused supplier of digital education. He offloaded storied assets such as the Financial Times (which his predecessor, Marjorie Scardino, had vowed would be sold “over my dead body”), a half share in The Economist Group, and Penguin Books. It was a torturous transition from the start, marked by successive restructurings and job cuts, waves of M&A, a series of profit warnings and a shareholder revolt over the CEO’s pay.

Fallon’s successor, former Walt Disney Co. executive Andy Bird, took over two years ago and has broadly followed the same strategy, accelerating the push into online learning with Pearson+, a direct-to-consumer subscription service aimed at college students whose name echoes the Disney+ streaming service. On Monday, the London-based company posted nine-month sales growth of 7% (led by a 28% advance at its English-language learning unit), forecast operating profit that exceeded consensus estimates and raised its dividend by 5%. The stock rose 8.7% to its highest in more than three years (though gave up some of those gains in Tuesday trading).

Pearson is entitled to feel some measure of vindication. In March, the company said it rejected two offers from private equity firm Apollo Global Management Inc. at 800 pence and 854.2 pence per share, arguing they “significantly undervalued” the company. The shares slumped in response (having run up in anticipation of a possible takeover), but at 976 pence as of Monday’s close, are well above either of those bids. At a market cap of more than $7.5 billion, Pearson no longer presents such a tempting target for an acquirer. A yawning valuation gap to Relx Plc, the academic publisher to which the company is often compared, has been halved. Pearson is trading at a multiple of 12.3 times enterprise value to estimated earnings before interest, tax, depreciation and amortization, versus 16.8 for Relx. At the start of March, those numbers were 8.5 and 16.1.

Some fund managers scarred by more than one false dawn may remain wary. Once a darling of the FTSE-100 Index, Pearson lost more than a quarter of its market value in one day in 2017 after a negative earnings revision contrasted with months of optimistic pronouncements from Fallon. In early 2019, it ranked as the lowest-rated stock on the FTSE index by analysts. This year, as of Tuesday, it’s the best-performing stock of the 100 on the FTSE.

For all the tribulations of the last decade, there’s an argument that the decision to concentrate on the education business was always sound. Just because the company endured setbacks, and gave up assets that in themselves remained promising, doesn’t invalidate the case. Holding in place wasn’t an option against the tsunami of digitization and online learning. Good strategy is often a matter of hard choices, focusing limited resources on the areas that offer the greatest opportunities and where a company can bring its competitive advantage to bear most effectively.

To some extent, Pearson has owed its troubles to factors that were beyond its control, such as falling rates of college enrollment in the US, a market that makes up a quarter of sales. Where the company can be criticized is in failing to move quickly enough to capitalize on trends such online delivery of college textbooks and second-hand renting, which undermined a once hugely profitable print business. That’s a failure of execution rather than vision, though. Education still represents a vast opportunity: a $5 trillion market that’s estimated to grow to $7 trillion by 2030, according to Pearson’s last annual report.

If some of Pearson’s struggles have come down to bad luck, time and chance can also work the other way. The pandemic has accelerated the move toward online learning. The company also, fortuitously, has some desirable Brexit-proof attributes, being a services exporter that gets most of its revenue from overseas and therefore benefits from the pound’s weakness. Every 1 cent movement in the dollar-sterling exchange rate equates to 3 million pounds of adjusted operating profit, Chief Financial Officer Sally Johnson told Monday’s earnings call.

It’s not all blue sky. Sales in Pearson’s higher-education segment, its second-biggest accounting for a quarter of revenue last year, are still falling: down 4% in the first nine months. The exchange rate could change direction, now that the markets have seen the back of Liz Truss. The company deserves a solid B for the moment, though. “Keep it up” are the watchwords now.