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This FTSE 100 stock’s now on sale! Brilliant ISA buy or investment trap?

Pearson’s (LSE: PSON) not had the best of it in recent days. After pootling along for the past 12 months, the FTSE 100 firm’s share price fell through the floor late last week. The publishing giant dropped 14% following a profit warning last Thursday, and closed at levels not seen since March 2018.

This decisive move lower undoes all of the optimism Pearson had received on hopes that its painful restructuring strategy was finally bearing fruit. It also leaves it trading on a forward price-to-earnings  ratio of 12.3 times, comfortably below the broader FTSE 100 average of around 14.5 times.

The question, then – is Pearson worthy of serious consideration from dip buyers today? Or should investors ignore this battered blue chip, despite its being on sale?

Printing more profits problems

Pearson has thrown the kitchen sink at its switchover from print to digital, but last week’s update shows that it’s far from out of the woods. Because of weaker-than-predicted sales of physical textbooks at its US Higher Education Courseware arm, it said that “adjusted operating profit [should] be at the bottom of the guidance range of £590m to £640m” in 2019.

One can’t help but fear that the education giant has really dropped the ball on this one. Revenues at US Higher Education Courseware are said to have tanked 10% in the nine months to September, leading the company to predict that full-year sales there could drop between 8% and 12%. Pearson had previously tipped a far-more modest fall of between 0% and 5%.

It would be a mistake to lump all of the publisher’s problems at the door of the sinking print market, however. Between January and September, the Footsie firm saw digital revenues at the division rise only “modestly,” a reflection of falling college enrolment numbers and growth in the free open educational resources market. A loss of market share also impacted sales in the period.

More share price woe to come?

Pearson clearly needed to change its focus from publishing traditional paper-based materials to electronic journals and textbooks. The firm expects the ratio of digital:print as the source of group revenues to widen to 65:35 by the close of 2019, from 55:45 at the close of last year.

That’s the good news. The bad news? A shocking rate of decline in the print market and immense structural problems for its digital titles, too.

Some would point out that sales at its US Higher Education Courseware unit only account for a small slice of the pie (25% of group sales to be exact), and that sales across the other three-quarters of the business grew 3% in the first nine months of 2019.

However, I’m still not convinced to buy Pearson for my ISA, as I reckon more share price crashes could be around the corner. The firm’s been caught out (and quite spectacularly, too) by the scale of the erosion in this still-chubby US academic division.

I’m concerned that the company’s hopes that revenues will “stabilise” this year and that it will return to sales growth in 2020, may be overly optimistic. It’s still a share that’s to be avoided, in my book.

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Royston Wild 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.