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Warning! I think this FTSE 100 dividend stock could fall 30% in 2020!

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If there were an award for the worst-performing FTSE 100 stock of the past few years, Pearson (LSE: PSON) would have to be a contender.

Since the beginning of March 2015, shares in the company have lost nearly two-thirds of their value, excluding dividends, as the business has struggled to reposition itself for the 21st century. 

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Growth struggles

Pearson describes itself as a learning company. It produces and sells educational products to students, universities and governments around the world. 

However, as students globally have shifted from expensive textbooks to online materials, Pearson has struggled to keep up with its changing market. 

Over the past four years, the company has issued four profit warnings, including one at the end of September.

At the end of September, the company revealed that sales at its US university business were down 10% in the first half of the year. This division makes up a quarter of group revenues. 

To illustrate just how rapidly the market has changed, as part of the company’s shift towards digital-first publishing, earlier this year, Pearson announced that it would only print 100 new editions of its 1,500 university-level books in 2020. Last year, the firm published 500 editions. 

Considering these headlines, I do not think that Pearson’s problems are going to come to an end anytime soon. And with this being the case, I think the stock is set to fall further in 2020. 

Shares in the education business are already trading at a premium of around 10% to the broader publishing sector. As earnings are falling, I reckon Pearson deserves a discount, not a premium valuation. 

According to my calculations, a discount of around 20% of the sector gives an estimated fair value of 460p per share, approximately 30% below current levels. That’s assuming Pearson does not issue yet another profits warning.

Growth champion

A company that could be an excellent replacement for Pearson in your portfolio for 2020 is CRH (LSE: CRH).

This building materials business has gone from strength to strength over the past six years. As Pearson has struggled to adapt to the changing education market, CRH has capitalised on its size and scale in the European construction market.

Earnings per share increased from €0.31 in 2013, to €1.81 for 2018, and City analysts are expecting further growth during the next two years. Analysts are projecting earnings per share of €2.29 for 2020, which puts the stock on a 2020 P/E of 15.3. 

A multiple of 15 times earnings might seem expensive for a cyclical construction business like CRH, but the company’s size is its key strength. Most smaller competitors are just not able to achieve the kind of profit margins and economies of scale available to the group. That’s why, in my mind at least, this business deserves a premium valuation. 

On top of its growth track record, shares in CRH also support a dividend yield of 2.2%, and the payout is covered nearly three times by earnings per share.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pearson. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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