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Brilliant dip buy or investment trap? This FTSE 100 stock is dealing at a HUGE discount

There’s a galaxy of undervalued shares floating around on the FTSE 100 today. I’m certainly not tempted to buy into Pearson (LSE: PSON) any time soon, though. Full-year financials are scheduled for release on Friday, 21 February. Darkening clouds over at its North American higher courseware business make this one to avoid, in my view.

The company certainly spooked the market last time it updated the market, in mid-January. That statement sent its share price plummeting to its cheapest level in almost 12 years. Then it had said that 2020 adjusted operating profits could slump by almost £90m (or 15%) from the £590m it expects this year. A range of £500m to £590m was given.

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Sliding sales

The market had hoped that intense restructuring and a doubling-down on the digital end of the educational publishing market would save Pearson’s bacon. It’s why Pearson’s share price bounced higher in 2018. But reality has clearly set in for investors, and the huge structural problems the firm faces aren’t going away.

Pearson’s US higher education courseware business accounts for almost a quarter of group revenues, and in 2019 sales there dropped a whopping 12%. The proportion of digital-based business versus print is rising, but this is providing no respite given the decline of its physical texts. Sales of its electronic products remain modest at best.

Pearson’s decision to “unbundle” print and digital products in favour of “digital only” formats caused sales of its bundled texts to slump 45% in 2019. And Pearson says that it expects the trends of last year to continue. It says that “heavy declines in print [will be] partially offset by modest growth in digital as more products are added to the [global learning platform].”

On the ropes

It’s quite possible that glass-half-full investors will be tempted to buy into Pearson today, though. The London company says that “as product releases accelerate from the end of 2020 onwards, digital growth will also accelerate.” And with recent share price falls leaving the business dealing on a forward price-to-earnings ratio of around 10 times, quite a few dip buyers could be tempted to take the plunge. Compare that reading with the broader FTSE 100 average of around 14.5 times.

Such individuals could find themselves on a hiding to nothing, though. A move to the digital end of things would appear to be a good idea amid sinking print sales. However, with college enrolment numbers still steadily falling in the US, and the free open educational resources market also picking up speed, it’s quite likely that sales of its electronic textbooks will keep on struggling.

City analysts certainly don’t expect Pearson to turn around the bottom line any time soon. Current forecasts suggest that earnings will tank 19% in 2020. They predict an additional 2% drop in 2021, too. Though given the publisher’s record of issuing profit warnings both these numbers are in severe danger of being downgraded.

Pearson’s cheap, okay. But that’s surely what you should expect from a struggling company with rising debt levels. I’d much rather put my hard-earned cash to work elsewhere on the FTSE 100.

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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.