The FTSE 100 enjoyed a 9% rally yesterday. Something not witnessed since 2008. After weeks of negative sentiment and headlines filled with doom and gloom, this made a pleasant surprise. So, is this turnaround set to continue, or merely a bump in a long, rocky road?
I wouldn’t be too sure that we’ve seen the worst of the dips yet. Many companies are yet to realise the full force of the coronavirus pandemic’s destructive powers. Despite global stimulus packages being whipped out left, right and centre, many businesses will still suffer losses and may be forced to cut dividends.
However, there will be some that go the distance and those with the least debt are likely to have the best chance of success.
Lifelong learning business Pearson (LSE:PSON) is being both adversely and positively affected by the coronavirus outbreak. With testing centres and schools closing, Pearson’s profit and cash flow are suffering. It has forecast a £25m-£35m hit to operating profits for 2020. In response, it suspended its share buy-back programme and intends to find ways to cut costs.
Playing the long game
On the other side of the coin, the £3.7bn company may well pull in an influx of parents looking to home-educate and self-study. Television personality Carol Vorderman has offered home-schooling parents free access to her maths website, which is a Pearson Education-owned site. The website was completely overwhelmed with interest and crashed shortly after her offer was made.
This could generate a lot of potential data leads for Pearson. It’s not yet known how long people will be home-schooling for, but many families may like it so much, they commit to paid products. I’m pretty sure that will be the minority, but some parents may enjoy the one-to-one tutoring experience that children get from online resources and continue to subscribe.
Along with individual learners, some of Pearson’s biggest clients include institutions, governments and professional bodies. It operates globally with a significant segment in the US and Canada.
Tracking the FTSE 100
Since March 5, Pearson’s share price has been beating the FTSE 100 index. Yesterday it rose over 9%, in line with the remarkable FTSE 100 rise.
In a company update two days ago, Pearson confirmed it had seen a significant uplift in customers using its digital products and services since the pandemic began. It also confirmed it’s in a good financial position with approximately £1bn in liquidity available now. It’s a relatively low-debt company with a debt ratio of 30% and 44% gross gearing.
The FTSE 100 company’s 4% dividend yield makes this stock attractive to long-term shareholders, and earnings per share are 34p.
I think Pearson shares are worth holding if you own them. However, the share price is slipping back today and with the stock market being in a precarious place, I wouldn’t be rushing to buy them just yet. I’m concerned that the recent market crash is set to resume as the coronavirus takes hold in the UK. Pearson could even be on sale at a more favourable price in the near future. We don’t advocate trying to time the market here at the Motley Fool, but in such volatile times, we do advocate doing careful research before committing your cash.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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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.