Narrow-Moat Pearson Surprises With Positive 1Q Update

Narrow-moat

Growth of 7% in North America--Pearson’s largest division, which generates more than 70% of operating profit--was driven by growth in higher education and K-12 courseware. Surprisingly, Pearson has issued a strategic review of its K-12 business due to the slow adoption of digital courseware, an issue many did not know existed. The key for us in North America was the unexpected growth in higher education, but given the strong weighting to the second half in this business, we defer our enthusiasm until later in the year if, and when, the momentum in this business continues.

Given the lack of top-line growth in Pearson over the past five years, restructuring and cost-cutting measures have been paramount in increasing profitability. The announcement of another significant cost-saving program has clearly excited investors, with the shares up strongly on the announcement; however, with little detail thus far on this program, we await tangible signs of improvement in these areas before attributing full credit for these measures.

Overall, there were many positives in this update, but equally, some concerns and challenges remain, including the effectiveness of Pearson’s eBook rental program in U.S. higher education, which was the key source of the group’s disappointing performance in 2016.

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