But could the Pearson share price recover strongly in 2026? If City forecasts are accurate it might — 11 analysts have slapped an average 12-month price target of £12.07 on the company. That represents a 34% rise from current prices.

I’m not convinced, though. Here I’ll explain why I’m avoiding Pearson shares like the plague.

No value stock

Market panic often leads to some top-quality shares being unfairly oversold. Picking these up can have enormous advantages for buyers, as (in theory) they can deliver huge profits when investors wake up and re-rate the share.

The trouble is, Pearson doesn’t fit into this category for me. For one, it doesn’t look especially cheap. At 904.2p per share, the publisher trades on a forward price-to-earnings (P/E) ratio of 13.8 times.

That’s lower than the 10-year average of roughly 16 times, true. But it doesn’t smack of ‘bargain basement’ territory, in my opinion. And it doesn’t leave significant scope for a price rebound, either.

In fact, given the enormous challenges it faces, I think the company could — or indeed, should — be trading much more cheaply.

AI threat

Pearson’s done many things since its creation in 1844, including drilling for oil and manufacturing porcelain. But during the 1990s it pivoted solely towards the education sector, becoming one of the world’s largest suppliers of textbooks and testing to schools, colleges and universities.

This creates a massive problem nowadays, though, as it leaves the firm in danger of being mowed down by AI. Accuracy issues continue to plague these new technologies, but rapid progress creates a serious threat. They also offer capabilities that standard textbooks and the like don’t, such as the ability to create an interactive experience for students.

Pearson’s not sitting on its hands, and is developing its own suite of AI tools to turn this into an opportunity. It’s seeing some success here, with sales at its Virtual Learning unit rising 20% in Q4. Digital and AI enhancements are more heavily used in this part of this business.

But on balance, I think AI creates more danger over the long term than opportunity. Last year, Pearson’s US rival Chegg slashed 45% of its workforce due to what it described as “the new realities of AI.”

High risk, high reward?

Unfortunately for the FTSE firm, the rapid advancement and adoption of AI isn’t the only threat to future earnings. Pearson operates in a highly competitive field, and last year it’s shares dived after it lost a major American student assessment contract in New Jersey. Similar setbacks are an ever present threat.

Pressures on education budgets across its markets represents another significant danger. With public finances stretched and costs rising, governments are likely to keep their spending on learning materials dialled down.

Pearson’s early AI successes may tempt some investors after that recent share price weakness. But I won’t be adding the FTSE firm to my portfolio right now.

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Not all FTSE shares have seen spectacular gains, though. Bunzl (LSE:BNZL), Pearson (LSE:PSON) and Diageo (LSE:DGE) shares have plummeted for one reason or another during the last 12 months. This means their forward price-to-earnings (P/E) ratios have dropped below the long-term average.

Does this make them brilliant bargains to consider or classic value traps? Let’s take a look.

Bunzl

Bunzl’s share price has been the FTSE 100’s worst performer over the past year. Down a whopping 37%, it’s plummeted as margins have been squeezed by rising costs and surging competition.

As a result, the support services provider now trades on a forward P/E ratio of 15.1 times. That’s below the 10-year average of around 18 times.

Does this represent an attractive entry point for share pickers? Possibly, though that isn’t the sort of discount that turns heads. On balance, I think Bunzl shares are worth a close look today.

Margin pressures remain a threat. But as interest rates drop and end markets improve, I think it could rise strongly in 2026. Bunzl tipped “moderate revenue growth… at constant exchange rates” this year. Recent acquisitions could also give sales a shot in the arm.

Pearson

Pearson carries a similar forward P/E ratio, at 14.9 times. Yet in this case, the textbook publisher’s multiple is just below the 10-year average.

As a producer of educational material for schools, colleges and universities, it’s been hit hard as institutions have trimmed their budgets. It’s also suffering due to severe market competition — its shares slumped again this month after announcing the loss of a major US student assessment contract in New Jersey.

My main concern for Pearson, though, is the growth of artificial intelligence (AI) and what this means for long-term growth. The FTSE firm’s building and rolling out its own AI tools to capture rising demand. And it’s seeing some success. Still, I see this new technology as more of a threat than an opportunity.

I’ll therefore be avoiding the FTSE 100 firm right now.

Diageo

Could Diageo shares be a better buy for bargain hunters? Down 30% over the last 12 months, the Guinness manufacturer trades on a forward P/E ratio of 13.2 times.

That’s far below the 10-year average of 20.8. With a new chief executive at the helm, I think 2026 could prove a transformative year for Diageo and its share price. Under new head Dave Lewis, cost reductions, brand divestments and a refocused sales strategy could all help the company break out of its long-term downtrend.

I’m also hopeful that falling interest rates will help rejuvenate demand for its premium drinks. As an investor myself, though, I’m mindful that declining alcohol consumption in its Western markets could hamper any recover.

While it’s not without risks, I think Diageo shares could — at current prices — be one of the best recovery stocks to consider buying today.

The post Down 25%+, are these FTSE 100 losers the best stocks to buy in 2026? appeared first on The Motley Fool UK.

The innovation of the internet eventually placed the world’s knowledge quite literally in the palm of an individual’s hand. But with the pace of technological change accelerating and the half-life of a learned skill continuing to shrink, the only factor that keeps an individual competitive in today’s world is to be a lifelong learner.

This is the unique selling point of Pearson (LSE: PSON), which can trace its roots back nearly 200 years. Today, it’s a multi-media giant that offers education and learning materials to schools, colleges, universities and organisations. It’s also a pre-eminent provider of English language learning.

H1 results

Today (1 August) the stock surged 5% in early trading on the back of a solid set of results. Both revenue and operating profit was up 2%, and free cash flow surged to £156m. It also hiked the interim dividend by 5% and is halfway through a £350m share buyback programme.

The company’s biggest division, assessment and qualifications, won several new contracts. It also renewed a number of key contracts with US schools for the supply of testing materials at primary and secondary level.

The company continues to invest heavily in integrating AI across its study materials. For example, through its partnership with Amazon Web Services, it recently launched an AI-powered GCSE Exam Practice Assistant.

Changing world

The world of education is changing at break-neck speed. Traditional education systems that have existed since Victorian times, look increasingly out-of-date. It’s a similar story in the world of work.

We’re still very much in the foothills of the AI revolution. Its true transformative nature is yet to unfold. But what’s becoming increasingly obvious is that the technology is already leading to the displacement of many roles, through automation.

In short, people will need to become better learners, if they’re going to make themselves relevant. Learners at school will need to be equipped with the skills that make them employable, and adults will need to learn to unlearn old habits before acquiring new skills.

People talk about the AI arms race. I think it’s more appropriate to call it the skills and knowledge race. And the stakes for economies and society couldn’t be bigger.

Risks

Ironically, content generation through AI could be the biggest risk for Pearson. Its key relationships with institutions of all kinds are built upon proprietary intellectual property. But if its offerings don’t sufficiently differentiate themselves from what I’s freely available, then long-term revenues could decline.

Big tech is increasingly turning to Pearson to roll out talent management programmes. Today, it partners with AWS, Microsoft and ServiceNow in a number of different ways. For example, as the hyperscalers continue to invest billions of dollars in data centres, their engineers are working with the learning provider on the development of its own AI product suites.

I have long admired Pearson. It may not be the best-known name out there but its products most certainly are. I view it as a novel way to gain exposure to AI and is a stock investor may consider looking further into.

The post Could this FTSE 100 stock be at the centre of the AI revolution? appeared first on The Motley Fool UK.

Our monthly Fire Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of growth-focused Fire recommendations, to help Fools build out their portfolios.

• A former diversified publishing giant, it has repositioned itself as a pureplay education business. 
• The company, whose portfolio is now roughly 82% digital or digitally enabled, is learning to operate more as a software business so that it can innovate faster and offer new learning experiences that are personalised and accessible”.
• In its latest fiscal year, underlying sales grew by 3% to £3.6bn, while adjusted operating profit climbed by 10% to £600m due to operating leverage and cost efficiencies.
• Potentially, its assessment and qualifications business could see a tailwind if people need to reskill to meet future labour needs in the face of technological changes. 
• The company has long sought to take advantage of AI, which students should increasingly use to master Pearson’s courseware and which Pearson reckons should improve the efficacy of its education products.
• While artificial intelligence tools might also pose a threat to Pearson’s business, in our view it’s unlikely educators – who trust Pearson to help students achieve the best outcomes – will embrace unproven technologies at the expense of a trusted provider like this one.
• We reckon its digital credentials are continuing to improve. It recently agreed strategic partnerships with Amazon and Microsoft to use AI tools for learners, educators and employers, helping validate Pearson’s claim to be a major software business.

The post Just released: the 3 best growth-focused stocks to consider buying in April [PREMIUM PICKS] appeared first on The Motley Fool UK.

Our monthly Fire Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of growth-focused Fire recommendations, to help Fools build out their portfolios.

• A former diversified publishing giant, it has repositioned itself as a pureplay education business. 
• The company, whose portfolio is now roughly 82% digital or digitally enabled, is learning to operate more as a software business so that it can innovate faster and offer new learning experiences that are personalised and accessible”.
• In its latest fiscal year, underlying sales grew by 3% to £3.6bn, while adjusted operating profit climbed by 10% to £600m due to operating leverage and cost efficiencies.
• Potentially, its assessment and qualifications business could see a tailwind if people need to reskill to meet future labour needs in the face of technological changes. 
• The company has long sought to take advantage of AI, which students should increasingly use to master Pearson’s courseware and which Pearson reckons should improve the efficacy of its education products.
• While artificial intelligence tools might also pose a threat to Pearson’s business, in our view it’s unlikely educators – who trust Pearson to help students achieve the best outcomes – will embrace unproven technologies at the expense of a trusted provider like Pearson.
• We reckon Pearson’s digital credentials are continuing to improve. It recently agreed strategic partnerships with Amazon and Microsoft to use AI tools for learners, educators and employers, helping validate Pearson’s claim to be a major software business.

The post Just released: the 3 best growth-focused stocks to consider buying in March [PREMIUM PICKS] appeared first on The Motley Fool UK.

It’s up a staggering 145% over the past five years, making it one of the UK’s best blue-chip performers. The success continues, up 33% in the last year.

The company in question is online education publisher Pearson (LSE: PSON). And now I’m wishing I paid more attention to it in class.

On checking, I discovered that I last wrote about Pearson back in May 2023, in what was in a pivotal time for the stock.

ChatGPT had just exploded onto the scene, and investors were worried about the impact on Pearson. Why pay for its traditional educational resources when punters could get it all for free thanks to the miracle of AI?

This share is smashing the FTSE 100

Shares in Pearson had just plunged 15% in a single day after US rival Chegg said it had been hit hard by the rise of ChatGPT as students jumped horses. 

Pearson’s board remained steadfast though, asserting that 80% of its revenues were generated outside the education sector, and it wasn’t worried.

I was though, and decided to refrain from buying the stock while I saw how things pan out. Pearson has done fabulously without me, but it wasn’t a racing certainty. The Chegg share price has crashed 98% in five years.

Fast forward to February 28 this year and Pearson’s resilience is evident. The company’s annual results showcased a 10% increase in adjusted operating profits to £600m, with a 3% rise in underlying sales to £3.5bn. 

The board rewarded loyal investors with a £350m share buyback and a 6% hike in the final dividend to 24p per share.

Pearson has been boosted by its strategic pivot towards digital and AI-driven solutions,while expanding its partnership with Amazon Web Services (AWS) to further integrate AI into its offerings. 

It now offers children access to an AI tutor to help with their homework, plus tools to help teachers enhance lesson planning.

All of which is great. I’m happy it’s doing well. The big question is whether it’s still worth considering today.

Dividend policy is progressive

My first thought is that Pearson a bit pricey, with a price-to-earnings (P/E) ratio of almost 22. That’s fair enough though. There’s a price to pay for success.

The trailing dividend yield is a modest 1.75%, despite that recenet 6% hike. But that’s what happens when a share price rockets like this one. The growth more than makes up for it though.

The consensus among nine analysts suggests a median one-year share price target of 1,381p. If accurate, this represents a mere 2% increase from today. This aligns with my concerns that the stock’s rapid ascent may be tapering off.

It looks like I’ve missed out on most of the fireworks. I still think it’s well worth considering with a long-term view. Rather than falling victim to ChatGPT and their ilk, the board has turned AI to its advantage. But it will have to keep on its toes.

The post Up 145%! This red-hot growth stock has flown completely under my radar! appeared first on The Motley Fool UK.

CEO Omar Abbosh told us that “our focus on operational and financial performance has driven growth across all divisions this quarter and we are on track to meet full-year expectations.“

Shares in the education and publishing giant gained 3% in early trading, with the price up 5.8% since last Friday’s close.

What to watch for

The company expects to hit full-year market expectations. That suggests about 55.8p in earnings per share (EPS), and a price-to-earnings (P/E) ratio of 19.7.

Forecasts indicate more than 67p in EPS by 2026, to drop the P/E to around 16.

The forecast dividend yield is only 2.2%, rising to 2.6% based on 2026 forecasts. Investors seem unlikely to be eyeing up Pearson as an income stock. At least, not in the short term.

But EPS looks set to cover the dividends by about 2.3 times in the next few years. So there might be room for a future dividend focus if the firm’s earnings growth plans come good.

Strong cash flow

Pearson reported underlying sales growth of 3% in the first nine months. And it seems to be picking up, with a 5% rise in Q3. But how might it convert to the folding stuff?

For the full year, the board expects cash flow conversion of 95%-100%. That’s one of the things I look for in a dividend stock, even if the current yield is modest.

Many companies have recorded what look like impressive earnings over the years. But not all have been able to convert enough into actual cash. And shareholder income has suffered in the long term.

Pearson has also completed its £500m share buyback, hoovering up 7% of its issued shares. That’s a significant portion, and it should hopefully provide a material boost for future per-share measures.

AI in education

My main concern at the moment is the fairly high valuation. And it’s at a time when a lot of FTSE 100 stocks still look very cheap, with plenty of big dividends around.

I’m also thinking of artificial intelligence (AI), which Pearson is making increasing use of. To me, it feels like it might be a bit of a double-edged sword.

The company is “scaling AI across our products and services,” and spoke of “double-digit year-over-year billings growth in Higher Education products with AI study tools.“

That sounds great, and this seems like a business where AI could really have a serious impact. But at the same time, are investors buying in just because AI is mentioned? And maybe pushing the price up a bit?

On the fence

Pearson is in a highly competitive market. And cheaper (and even free) AI learning tools could yet throw a spanner in the works.

But, I do think Pearson’s whole offering is more than the sum of the parts. And we could see a growing competitive advantage. I’m undecided on whether to buy, but I’m watching (and thinking).

The post As the Pearson share price gets a Q3 boost, should I buy? appeared first on The Motley Fool UK.

Still, at 1,004p, the share price is more than double where it was in 2020 during the dark days of the pandemic. Longer term, it’s been hit and miss, rising 21% in five years but falling 11% over a decade.

Here, I’ll consider whether I’d be interested in buying this Footsie stock.

The results are in…

In the first half, Pearson reported sales of £1.75bn. That was down 7% from the year before, but up 2% on an underlying basis when stripping out disposals. Underlying adjusted operating profit grew 4% to reach £250m, while free cash flow increased by £77m to £27m.

The firm said each of its five divisions performed in line with expectations:

• Assessment & Qualifications sales grew 2%
• Virtual Learning declined 1% due to contract losses
• Higher Education fell 2%
• English Language Learning rose 11%, with strong growth at Pearson Test of English (PTE) and Mondly (a language learning app)
• Workforce Skills sales grew 6%, helped by strong performance at Credly (a digital credentialing platform)

Management reiterated guidance for the full year and 2025. That would represent flat top-line growth in 2024 and a slight increase next year. However, profits should rise by double-digits as the firm benefits from efficiency savings.

Meanwhile, a 6% increase in the interim dividend was proposed, and 81% of a £200m share buyback programme was completed, as of 30 June.

Pivot to the future

We’re constantly hearing about the possible mass loss of jobs to AI. So, I’m interested in education companies, as these could experience significant growth by helping workers retrain with new skills and qualifications.

The irony is that I fear AI could also disrupt the education platforms themselves. I’ve long been bearish on Chegg, a US digital learning rival to Pearson. Students are increasingly using free AI bots like ChatGPT for answers rather than paying for subscription services. That genie is well and truly out of the bottle!

However, Pearson is a more diversified company, offering text books, tests and certifications, and learning platforms. I don’t see any evidence of ChatGPT-shaped disruption in the numbers today. But it could become more of a risk to parts of the business in future.

CEO Omar Abbosh actually sees AI becoming a powerful tailwind: “Significant demographic shifts and rapid advances in AI will be important drivers of growth in education and work over the coming years, and this plays to Pearson’s strengths as a trusted provider of learning and assessment services.”

Bargain territory?

The stock is trading at around 16 times forward earnings — in line with its historical average. So it’s hardly a bargain, but also not expensive. The dividend yield is 2.2%.

I found the H1 sales performance underwhelming. Longer term though, I’m now considering whether Pearson might be the best-placed firm to benefit from potential job disruptions caused by AI. I’m interested.

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AI vs traditional learning

According to a recent study, more than 55% of students have used AI at some point in the last year. This is only likely to increase as awareness of it and its usefulness grows. Some companies, such as Pearson (LSE:PSON), may see this as a threat to their business if users can research and engage with AI instead of reading a textbook. However, just as society has had to move with the times, so has this £6.6bn giant.

In the midst of the pandemic (and before AI really hit the headlines), the company transitioned from primarily selling textbooks to five distinct segments: Assessment & Qualifications, Virtual Learning, English Language Learning, Higher Education, and Workforce Skills. 

Fundamentals

Despite the challenges posed by the pandemic, the firm has demonstrated remarkable resilience. Through steady revenue streams, and focusing efforts on digital products and services, there’s still a tremendous opportunity for growth.

New CEO Omar Abbosh will likely be encouraged by the strong cash reserves and relatively healthy debt levels. The company recently announced a £300m share buyback programme. The dividend yield of 2.3% is also well covered by the company’s earnings, despite falling a long way from the peak of 7.8% in 2017.

Future growth

Management expect earnings to grow by 16.6% annually over the coming years, roughly in line with competitors. This is a notable jump from the previous five years, when earnings were declining at 19% per year. Cost savings of over £120m likely drove this turnaround.

The business clearly understands the importance of competing in high profit margin areas, such as remote learning and generative AI. Accordingly, the Pearson+ study tools looks to incorporate traditional learning with new interactive tools for several textbooks. It has now exceeded 1m paid subscriptions, with plans to expand AI capabilities to more textbooks in the collection later in 2024.

There’s also clearly a focus on emerging markets, with the English Language segment seeing annual earnings growth of 30% in the latest quarterly earnings. Both present enormous opportunities for the company to expand while innovating in existing markets.

Valuation

I see a lot of hidden potential in education companies able to use AI effectively. As the business redefines itself in these new areas, understanding the fair value of the share price is critical. Based on a discounted cash flow, the current share price could be over 30% undervalued. Similarly, the price-to-earnings (P/E) ratio of 22.7 times is below the sector average at 24.8 times. Growth is never guaranteed, but if the business can execute well, this represents an interesting opportunity for FTSE 100 investors.

What’s next?

AI will definitely play a role in the education of coming generations. As expectations grow, how well FTSE 100 companies incorporate technology into existing products and services will be critical. I see Pearson being in a position to lead the market, but how quickly educational providers and consumers can adjust makes me cautious. I’ll be adding it to my watchlist only for now.

The post This FTSE 100 company could be more than 30% undervalued appeared first on The Motley Fool UK.

Our monthly Fire Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of growth-focused Fire recommendations, to help Fools build out their portfolios.

• A former diversified publishing giant that has repositioned itself as a pureplay education business. 
• A recent trading update showed sales improving by 5% for the full year, with growth spurred by its assessment and qualifications business. 
• Adjusted operating profits are expected to arrive at £570-£575m, a 30% increase, due to both sales growth and cost savings. 
• Potentially, its assessment and qualifications business could see a tailwind if people need to reskill to meet future labour needs in the face of technological changes. 
• While artificial intelligence might pose a threat to Pearson’s business, the company feels that its education products can be “enhanced” by AI. 
• Moreover, in our view it’s unlikely educators – who trust Pearson to help its students achieve the best outcomes – will quickly embrace unproven technologies at the expense of a trusted provider like Pearson. This gives Pearson a chance to implement its own tools (a chatbot is currently in beta). 
• For now, as when the company was first recommended, we think net technologies present a compelling opportunity for Pearson. 

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