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The Pearson share price is leading the FTSE 100. Should I change my tune and buy?

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I don’t often see Pearson (LSE: PSON) leading the FTSE 100. But that’s exactly what happened Wednesday, as the Pearson share price climbed 7.5% in early trading to head the index. It’s all down to the company’s January trading update, which I found more reassuring than anything.

In a year that has highlighted the need for damage limitation, a reported sales decline of 10% over 12 months looks respectable. Courseware in North America declined 13% with the higher education portion down 12%. General international sales slipped by 19% due largely to school and test centre closures. A similar reason lay behind a 14% drop in global assessment sales. Against that, global online learning sales rose by 18%, marking an increasing shift towards that sales avenue.

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Pearson reckons its 2017–2019 restructuring plan brought incremental in-year benefits of £60m. And for the full 2021, the company expects a further £50m in cost efficiencies. Net debt stands at approximately £0.5bn, with available liquidity of around £1.9bn. For a company with a market cap of £5bn, that debt level really doesn’t look too troubling. But what has all this done for the Pearson share price?

The price is climbing

Well, I turned away from buying Pearson back in July last year. And what has happened since then? The Pearson share price has climbed more than 30%, that’s what. And since the start of the vaccine-led stock market recovery in November, it’s up 40%. I was happy with Pearson’s liquidity situation at the time. But I really didn’t see much clarity over the company’s long-term prospects. It has traditionally been a print-media education publisher, and I don’t see online success as being assured. At least not yet, partly due to the greater ease of competition in that space.

What does Pearson’s latest update say about that? Chief executive Andy Bird said: “At the end of 2020, we made several key hires to accelerate our digital growth and, looking ahead, we start the year with momentum, pace and confidence. Our broader goal is to become a more consumer-focused company, targeting the incredible opportunity that exists to have a direct relationship with millions of lifelong learners“.

Pearson share price valuation

That sounds promising, but I find it had to get a feel for valuation based on the current Pearson share price. Right now, the world of financial forecasting is pretty much shot, as the pandemic has created so much uncertainty. So any price-to-earnings forecasts we see must be taken with considerable caution. Saying that, my calculations, based on these latest figures, suggest a forward P/E of around 18.

Could that be reasonable? It might be, if Pearson can put in a few years of decent growth. My problem is that I have no way to tell how likely that is. We can never really know, of course. But right now, I’m having trouble even putting together any informed guesswork. Pearson might well be a good buy, with recovery followed by years of growth around the corner. But with the sizeable uncertainty I see hanging over it, the Pearson share price still does not tempt me.

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Alan Oscroft 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.

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