Are Pearson plc & Vodafone Group plc A Compelling Buy Right Now?

In its trading update for the quarter ended 30 June 2015, Vodafone (LSE: VOD) revealed today a stronger growth rate, which came in above expectations.

Things are getting better, yet there are still a few problems.

The same applies to Pearson (LSE: PSON), whose half-year numbers have just hit the wire: it isn’t doing particularly well, but news about the £844m disposal of The Financial Times to Japan’s Nikkei and a higher payout was welcomed by investors. 

Neither stock is on my wish list, however. Here’s why. 

Is Vodafone Building Trust? 

The shares of Vodafone roared back today in the wake of a first-quarter trading update that certainly pleased its shareholders. Its stock was up 3.7% in early trade, and could certainly gain strength when the US markets open, at least if recent quarterly trends can be trusted. 

Everybody wants to know if Vodafone has turned the corner — it hasn’t, in my opinion, and I need more evidence to commit to it. 

Admittedly, at +0.8%, its first-quarter organic service revenue growth was 0.2/0.3 percentage points above consensus estimates, and 0.7 percentage points higher than in the fourth quarter.

Trends are good, but its growth rate is still very close to zero.

It’s been a long way so far in its restructuring, and while European growth remains problematic (UK flat; Italy down 2%; Spain down 5.5%), Vodafone isn’t faring too bad in emerging markets — but it will need a steeper growth rate at group level to catch my attention. 

Germany & Valuation 

Its German operations are very important given their scale and the amount of investment that has been poured in the business over time: they reported a -1.2% growth rate against -2% in the previous quarter once the figures for cable operator Kabel Deutschland are included, which means that its acquisition-led strategy is paying some dividends. 

Does all this make Vodafone a buy, though? 

Well, based on fundamentals, its stock is still overvalued by at least 10% at 237p a share, where it currently trades, in my opinion.

I’d give it a pass. 

Pearson’s Restructuring Continues

The shares of Pearson are nicely rising at the time of writing (+2.6%), but there are a few things you should consider in spite of enthusiasm surrounding its latest divestment, which fetched a much higher valuation than the one that the market had expected. 

Its stock trades about 13% below the multi-year high of 1,517p that Pearson recorded in mid-March this year — but does that signal a buying opportunity? 

Its forward trading multiples based on net earnings stand above 20x, which does not signal bargain territory, particularly because the media and education sector is at a critical juncture. 

In a move away from media, it sold Mergermarket to BC Partners for £382m in November 2013. Now the FT‘s gone. 

Pearson is focusing more on education than on media, which is a strategy that makes a lot of sense, but the key question is whether it’ll manage to preserve its core profitability metrics.

The group reiterated its guidance for the year today, and the dividend rose 6% to 18p, but operating losses are widening, adjusted earnings per shares of 4.4p (2014: 4.7p) fell, primarily reflecting the sale of Mergermarket, while operating cash flow and free cash flow were down to -£333m and -£424m, respectively, from -£254m and -£328m one year earlier. 

Healthy cash flow and free cash flow are very important metrics when it comes to selecting the right equity investment, and this why I'd rather invest in one of these five shares than in Vodafone and Pearson present. 

Consider that sustainable cash flow and rising growth rates supported the surge in the valuation of a British consumer giant that is included in our report, and whose trading update surprised investors this week. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.