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Pearson shares dip: why a company data breach is never good for its share price

Pearson (LSE:PSON), the educational software company, announced this morning that it is the latest company to suffer a data breach with a hack that exposed the details of over 13,000 US students’ school and university accounts. The share price fell over 1% on opening. 

This is bad news for investors who just last week had been celebrating the positive turnaround the FTSE 100 company was making through its switch to digital, phasing out print publications.

In its 2019 half-year results, posted on July 26, the company had noted a rise in its six-month revenue and lifted its adjusted earnings-per-share guidance for the full year. 

Data spill continues

Pearson is not alone. Earlier this week Capital One disclosed a hack, with names and addresses stolen, affecting approximately 106m people.

Capital One’s CEO delivered a personal apology 10 days after discovering the breach. This is good PR compared to Pearson which, according to The Wall Street Journal, was informed about the cyberattack by the FBI, in March. In recent years it has become clear that consumers prefer a fast, transparent approach in dealing with data leaks. 

Sky was also suspected of a data breach eight days ago when it mysteriously emailed customers asking them to reset their passwords with immediate effect. This was not an actual data leakage but an act of ‘credential stuffing’ whereby an automated system tries to gain access to accounts using previously stolen and published usernames and passwords.

Further data breach examples in the UK include British Airways and Marriott, that have both been fined after the Information Commissioner’s Office (ICO) felt better data management could have avoided the hacks.

Long-term suffering

Pearson’s leak did not include financial data, the vulnerability has now been fixed and users affected have been notified.

I expect the share price will take a battering as the fallout from this data breach continues. And while I will not be rushing to buy the shares just yet, some might see an opportunity here.

The company has a low PEG rating of 0.4, which can indicate an undervalued stock. It has a low debt ratio of 43% and its recent positive results show that its concerted effort to switch to digital is paying off. A trailing price-to-earnings ratio of 12 is good. Adjusted operating profits increased 30% to £144m in its latest period, which echoes strong sales growth and cost savings. But its yield is only 2%.

Data breaches aside, it is not yet clear if this kind of growth and cost-saving can continue long term. Cutting out textbooks completely will only save money in the short term. At some point, the company will rely on its online offerings for profit (and that puts even more pressure on it to make its data secure). Online graduate courses appear to be getting weaker, competition is high and regulation of online education is fierce.

If it can get through this latest hurdle, then the share price may prove to be a bargain with time, but at the moment, for me, it is one to avoid.

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Kirsteen has no position in any of the shares 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.