Wednesday 18 January 2017 12:00 pm

Pearson fails to make the grade as shares fall 30 per cent after firm cuts forecast

Pearson's shares tumbled up to 30 per cent this morning, after the education company withdrew its profit goal for 2018.

It has also announced plans to sell its stake in publisher Penguin House, after an "unprecedented period of change and volatility". A textbook perfect storm.

Read more: These companies could start offering low-cost degrees

The numbers:

Operating profit for 2017 is expected to be £570m-£630m, with adjusted earnings per share of 48.5p to 55.5p. That's around £180m lower than it had anticipated at the beginning of 2016.

The education company and former owner of the FT, said this guidance is based on assumptions regarding further declines in enrolment and more pressures in the North American higher education courseware market for the year.

It has withdrawn its operating profit goal for 2018 "reflecting portfolio changes and challenging and uncertain markets".

The company also said it will reset its 2017 dividend due to the "unprecedented" slump in its North American business.

Share price dropped 30 per cent, and at the time of writing shares were trading at 240.50p.

Why it's interesting:

The embattled publisher has reeled off a series of profit warnings over the past few years.

This time last year, the firm announced a hefty restructuring plan including cutting 4,000 jobs and Pearson said its programme had been delivered in full, with the financial benefits £25m more than planned (a total of £375m).

It's now ramping up efforts to progress a digital move in higher education – "to manage the print decline" and said it intends to issue an exit notice on its 47 per cent share in Penguin Random House, with a view to selling its stake or recapitalising the business.

German media group Bertelsmann has said it may increase its stake in the publisher as a result. In a statement, chief executive Thomas Rabe said: "We are open to increasing our stake in Penguin Random House, provided the financial terms are fair. Strategically this would not only strengthen one of our most important content businesses, it would also further strengthen our presence in the United States, our second largest market."

The analyst view

George Salmon, equity analyst at Hargreaves Lansdown, said: "With the group fearing that textbooks and other educational equipment would enter terminal decline, Pearson took the bold step of changing tack. The group pinned its hopes on online and virtual courseware, and in 2015 sold off assets such as the Financial Times and Economist newspapers to generate the cash to hold the dividend steady through the transition. Those sales don’t look too smart now."

Ken Odeluga, market analyst at City Index, said: "The group’s decision to recast itself as a pure-play 21st Century educational publisher could scarcely have been timed more inauspiciously, though some of Pearson’s troubles are also beginning to look like fumbles.

"For instance, a business that is at least partly, tacitly, dependent on an inactive labour force in the states was never going to be sustainable. At some point, workers who had been opting to continue education instead of looking for work were going to switch horses, and that’s what happened. The resultant 30 per cent slide in quarterly education revenues is perhaps more than management could have been expected to foresee. But investors can rightly question the effectiveness of the group’s self-help measures, assuming it showed much foresight at all."

What the company said:

Pearson's chief executive John Fallon said:

The education sector is going through an unprecedented period of change and volatility.

We have already taken significant steps on restructuring, reducing our cost base by £375m last year. However, our higher education business declined further and faster than expected in 2016.

So we are taking more radical action to accelerate our shift to digital models, and to keep reshaping our business.

In short

It could be a bumpy ride for Pearson shares today (dropping up to 30 per cent by midday), after the company issued a profit warning and announced plans to sell Penguin Random House.