The Pearson (LSE: PSON) share price has had a strange few years. It rose through 2022, but in 2023, it dropped back.
We’ve just had an upbeat H1 report, so do we see a buying opportunity here?
Changing business
Pearson is in publishing, with its Education arm the biggest part. The way online media has gone in recent years, education has been transformed.
A generation of students faced some severe disruption during the pandemic. And without online learning, things could have been far worse.
After an early Covid tumble, the Pearson share price came back well in the second half of 2020. Investors, presumably, saw the way online education was saving the day.
Volatile shares
Since then though, we’ve seen some ups and downs.
The future of learning seems pretty clear now. But then, it’s not easy to put a valuation on a stock like this in such uncertain times.
Pearson is on a forecast price-to-earnings (P/E) ratio of 18 for 2023. That’s a bit above the FTSE 100 long-term average. And an expected dividend yield of 2.5% is really nothing to get excited about.
But if the firm enjoys the future growth that a lot of investors are hoping for, that could prove to be a cheap valuation.
First half
So what did the first half of 2023 bring? Things came out better than expected. The firm posted a 44% rise in adjusted operating profit, after underlying sales grew by 6%. It’s mostly down to a big rise in English Language Learning.
To me, that shows a key strength of this kind of business. The cost to develop online education material might be high. But the production costs are low, and margins can be nicely geared.
Adjusted earnings per share only rose modestly, to 25.6p from 22.5p the year before.
Cheap shares?
The interim dividend is up 6% to 7p per share (from 6.6p). If a firm can grow its dividends by 6% every year, over the long term it could be a very nice cash cow.
There’s enough cash for a share buyback too. In addition to last year’s, Pearson plans to buy up £300m of its own stock starting in Q3.
So the board must think the shares are worth buying at today’s price. It would be a poor use of surplus cash if they didn’t, at least.
Time to buy?
So do I see Pearson as a buy? I do like the company’s outlook. Guidance suggests margins should rise to the upper end of the mid-teens by 2025.
There is some net debt, at £911m. But for a £6bn company with annual sales of close to £4bn, I don’t see any real problem here.
There are fears of some threats from AI too. But, so far, I think that’s been overdone.
I won’t buy, because I go for dividend stocks rather than growth stocks these days. But I think Pearson could be a long-term winner for those who understand it and don’t mind a bit of volatility.
