Pearson Started a College; Is It a Good Investment?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chances are, we’ve all read a book printed by Pearson (NYSE: PSO), one of the world’s largest educational, business, and consumer publishing companies. Headquartered in London since its creation in 1844, the company also runs the Financial Times newspaper. Since the recession, shares of PSO have returned more than 60%, outpacing the publishing industry’s average (14.2%), and in between competitors like John Wiley & Sons (NYSE: JW-A) at 58.5%, and McGraw-Hill (NYSE: MHFI) at 71.6%. More recently, Pearson has been in the news for its acquisition of the Chinese firm Global Education and Technology, and its potential gains from revamped curriculum standards in 45 states. While the acquisition has been criticized for being surrounded by insider trading (see report here), the latter is expected to provide additional revenues between $1 and $8 billion, as schools are forced to buy new books, tests, and other classroom materials.
More importantly, the company has also announced that it will establish a for-profit college in the UK called Pearson College. On its website, the company touts phrases like “Study Business in a FTSE 100 Company” and promises that it will offer a “very different kind of business degree.” Speaking of such, the school’s degrees will be authenticated by Royal Holloway, a constituent of the University of London. The school promises students an internship program with one of their business partners, which include Cisco, BT, the Peter Jones Foundation, Atos, and Sony Pictures Entertainment. Additionally, one-on-one mentors are provided, assuming that the student is in his or her desired industry. The school’s launch date set for September of next year, and it will charge students tuition of just over $10,000 a year. While it remains to be seen how profitable this venture will be, the school does have a slight cost advantage over other for-profits, as it will not have to pay for any third-party educational materials.
Over the past three years, Pearson has grown its revenues by an average annual rate of 6.8%, which is higher than the industry average (-13.5), and its peers JW.A (3.4%), MHP (-0.6%), Reed Elsevier (NYSE: RUK) at 0.0%, and Gannett Co (NYSE: GCI) at -8.2%. Moreover, the publisher has been highly efficient, sporting operating (19.4%) and net (15.9%) margins far above industry norms (9.8%, 6.5%), which has allowed it to generate annual EPS of 48.3% over this same time. As can be expected, this growth easily trumps the industry average (21.8%), JW.A (17.3%), MHP (3.1%), RUK (15.2%), and GCI (0.0%). From a valuation standpoint, shares of PSO are currently trading at a Price-to-Earnings ratio (10.3X) below the likes of JW.A (13.8X), MHP (17.2X), RUK (14.2X), and its own 5-year (13.1X) and 10-year (20.4X) historical averages.
By the end of 2012, the Street is expecting Pearson to reach earnings of $1.33 a share, with this figure rising by 9.0% to $1.45 in 2013. Now, it can be expected that EPS will be suppressed over the next few years, as the company establishes a footprint in the for-profit education sector, but the move undoubtedly increase its growth potential over the intermediate term. If Pearson can meet its year-ahead EPS estimates, fairly valued shares can eclipse $30 a share by next summer; they currently trade in the $19 range. WealthLift’s Sentiment Index rates PSO as a strong buy, with an overwhelming majority of the community’s users placing an “overperform” rating on the stock. For more trading ideas in today’s uncertain market environment, visit WealthLift INSIDER.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of The McGraw-Hill Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.