Should I Buy Pearson plc?

I’m out shopping for shares again. Should I add Pearson (LSE: PSON) (NYSE: PSO.US) to my wishlist?

Education, education, education

Last time I looked at Pearson, back in February, brokers were busily reducing their target ratings and fretting over its growth prospects. Despite a modest valuation and solid yield, I decided it wasn’t the time to buy. A subsequent share price rise of just 4% in the past 12 months, against 15% for the FTSE 100 as a whole, confirms my suspicions that Pearson has a tough job ahead of it. Should I buy Pearson today?

The company’s recent interim management statement was a pleasant read, but hardly riveting. Sales grew 4% in the first nine months of 2013, led by its international division, in particular emerging markets. FT Group was resilient, with strong growth in digital subscriptions, up 24% to almost 387,000. Underlying revenue rose 5% in its international education unit, and 8% in its professional education division, but revenues were flat in North America. Profits were hit by the accounting impact of the merger between its Penguin division and Random House, and the weak market conditions for college textbooks in North American Education.

Textbook error?

Pearson’s restructuring programme has cost it £150 million, or £100 million after cost savings, but should accelerate the group’s shift into fast-growing economies and new digital markets. I do worry about future textbook sales, as iPads and other electronica invades the classroom. The internet has shaken traditional journalism and book publishing models, although Pearson has handled the challenge better than most. Its investment in technology, services and emerging markets has paid off so far. Weak advertising is a worry.

Management has a progressive dividend policy, up 7% in July to 16p. Pearson now yields a steady 3.5%, covered 1.9 times, a fraction above the FTSE 100 average. It trades at 15.4 times earnings, a fraction below the index average. Earnings per share growth has been negative in 2012 and 2013, but is forecast to hit an impressive 19% in 2014, taking that forecast yield to 3.9%. These are all solid numbers. Pearson is battling well to stay in touch with changing trends in reading and learning. It has been on a rapid learning curve, and responded well. But it faces quite a battle to maintain its educational standards.

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> Harvey doesn't own shares in any company mentioned in this article