Pearson Drops as Investors Call for Faster Drive to Digital

Pearson Plc shares have lagged behind peers since hitting a 12-year high in July as a restructuring at the publisher of everything from textbooks to Tom Clancy’s thrillers failed to convince investors of its digital strategy.

The owner of the Financial Times newspaper has dropped 9 percent since the end of July, when it reported sales that topped analysts’ estimates. While the stock is up about 4 percent this year in London, it’s the worst performer in the 48-company Bloomberg World Media Index. Reed Elsevier NV jumped 30 percent and Wolters Kluwer NV climbed 24 percent.

Pearson shares, which dropped 2 percent on Oct. 2 when best-selling author Clancy died, have been volatile through its first year under Chief Executive Officer John Fallon, who succeeded Marjorie Scardino in January. This year, adjusted earnings per share will probably decline 7.2 percent, according to data compiled by Bloomberg, falling to 2010 levels. Sales -- which beat estimates in the first half -- will probably shrink 3 percent this year and drop again in 2014, the data show.

That’s been a tough pill for investors to swallow, especially after seeing sales triple during 15 years under Scardino, who was the first female CEO of a major U.K. company and made a Dame of the British Empire in 2003.

Scardino Halo

“Under Scardino, Pearson had a halo and it performed well and delivered earnings growth,” said Alex DeGroote, a media analyst at Panmure Gordon in London. “With the new CEO, earnings growth has gone into reverse. Sales are irrelevant; it’s about profit.”

The London-based company said in February it anticipated operating profit to be little changed this year and Fallon unveiled a firm-wide reorganization in May, increasing spending to accelerate its push into digital services. Pearson reiterated in July its projection for full-year adjusted earnings per share that are little changed from 82.6 pence for 2012, before net restructuring costs of about 100 million pounds ($161 million).

Pearson is streamlining its diverse businesses, which include educational materials, the Financial Times Group business information provider, and book publisher Penguin Random House, which was created from a merger with Bertelsmann AG’s Random House division. Since July, Pearson no longer fully accounts for the unit’s revenue.

In January, the operations will be split along business units -- School, Higher Education and Professional -- and geographical lines, for North America, Core for countries that are traditional areas of strength like the U.K., and Growth, for emerging markets such as Brazil and China.

Accelerating Migration

“The point is Pearson is migrating and accelerating the migration,” said Steven Liechti, an analyst at Investec Securities Ltd. “They’ve also been acquiring and transitioning to services assessment, teaching systems and administration systems that are incremental and new to Pearson. It’s not straightforward and there are bound to be bumps.”

A Pearson spokesman said the company’s stock decline followed a 15 percent increase for the month of July, and that the company has been at the forefront of the shift to digital in education and publishing.

Bloomberg LP, the parent of Bloomberg News, competes with Financial Times in providing financial news and information.

Today, Pearson rose less than 0.1 percent to 1,240 pence in London after falling as much as 1.1 percent.

Pearson is spending on the reorganization and push to digital services as it faces new rivals such as Rupert Murdoch’s Amplify, as well as longtime competitors. While business-to-business publishers Wolters Kluwer and Reed Elsevier are almost fully digital, it accounted for just half of Pearson’s sales last year.

$50 Books

DeGroote said he sees parallels between the publishing and music industries in how they’ve confronted the challenges brought by the Internet and digital products, from piracy to new consumer habits.

“Students that are 19 to 21 years old with no money or limited money are not spending $50 on a book when they can get it off the Internet for free,” he said. “Or they will buy chapters, not entire books, just like we no longer buy an album but a single song.”

CEO Fallon called the music industry analogy “fundamentally flawed” when asked about it during an analyst presentation in July.

“You can’t learn just by consuming content either in print or digital formats,” Fallon said. “So if all we were doing as a business was trying to migrate printed textbooks to digital, then I would understand the analogy. That is fundamentally not what we’re doing. It’s this connected learning that really transforms the business of scale, and it opens up a much bigger opportunity for us.”

New Rivals

Pearson has supporters such as Sanford C. Bernstein analyst Claudio Aspesi, who in an Oct. 4 note called the stock “our top pick for the longer term.” Pearson has been hindered by schools’ reluctance to move online, he said in an interview last week, adding that the company is highly equipped to “drive the transition to digital education.”

New competitors are also shifting the landscape for educational companies. Discovery Communications Inc. has made inroads in science publishing and charging lower prices than Pearson because they can “piggyback on things they are producing already for their core business,” Aspesi said.

And Murdoch has stepped in with Amplify, which has teamed up with AT&T Inc. to develop a tablet-based curriculum for K-12 students.

Pearson’s transition “introduces a level of uncertainty over outcomes which has no parallel in the recent history of the company,” Aspesi said. Still, “we are confident the transition to digital education represents a significant opportunity for Pearson.”

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