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What’s next for Pearson, the world’s biggest education publisher?

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What’s next for Pearson, the world’s biggest education publisher?

Pearson boss John Fallon faces a daunting task to arrest the decline of the world’s biggest education publisher as it battles growing political and economic strife.

Fallon has endured a rough ride since he took over in 2013, with a string of profit warnings marking his tenure, in an abrupt end to the steady growth enjoyed by his predecessor Marjorie Scardino during her 16 years in charge.

He is heading a company facing struggles on many fronts. In the United States – its biggest market – it has been hit by a political row that has hampered sales of textbooks, and by school-leavers opting for employment over higher education.

Slowing Economies, Education Spending Cuts

Sales have also been held back by slowing economies and education spending cuts in emerging markets, a key focus of its new strategy, all while the company is grappling with the shift from print to digital that is reshaping its business model.

Pearson’s market value has almost halved since March – wiping off around 6 billion pounds – as investors questioned how long they would have to wait for future earnings growth. Its latest profit warning a month ago alone wiped £3.3 billion off its value.

Asked when it expected Pearson to return to “meaningful growth”, one institutional investor said: “I am suspicious they won’t.”

Doubling Down On Education

pearson educationIt falls to Fallon to reverse the problems at the 171-year-old British company, which tied its fortunes to education publishing even more tightly this year when it sold the Financial Times and its stake in The Economist.

The Big Challenge For Pearson

“The big challenge for Pearson is we haven’t grown in five years in underlying terms,” a relaxed, if tired-looking, Fallon told Reuters in an interview in his London office overlooking the River Thames.

“We thought our biggest markets could recover more quickly than they have done.”

Having graduated from university in Hull in north England, Fallon worked as a researcher for politician John Prescott, who went on to be deputy prime minister, before joining Pearson in 1997 as communications chief. Before becoming CEO he ran the firm’s education businesses outside North America.

The 53-year-old must now convince investors that he can deliver earnings growth, and soon.

He told the market in recent weeks he now expects growth to return in 2017, rather than the 2016 he had previously predicted. Another pushback would further unnerve investors.

American Woes

Unlike its rivals such as Houghton Mifflin Harcourt, Pearson operates across most areas of education – school, higher education, textbooks, testing – and across the world.

With governments under pressure to improve education, and technology providing new ways to deliver and monitor the results, few analysts doubt the long-term potential for Pearson, a world leader in online and classroom teaching and testing.

But in North America, which accounts for 60 percent of group sales, its rollout of textbooks and tests for a U.S. programme of national educational standards called Common Core has been hampered by a political dispute.

The new system, which aims to emphasise critical thinking over learning by rote, has been seized on as a symbol of ‘Big Government’ overreach by U.S. conservatives, many of whom have criticised Pearson due to its leading role in it.

The take-up of Common Core products such as textbooks has been slower than expected, hitting the British firm.

Fallon is hoping his new Chairman Sidney Taurel, the former CEO and chairman of U.S. pharmaceutical giant Eli Lilly, will be able to help smooth the way due to his strong political connections in the United States, where he has previously advised the government on a number of issues.

Meanwhile in U.S. higher education, Bernstein analysts said Pearson’s focus on what they called the “lower tier” of colleges had made it vulnerable as the country’s economy recovers. As the job market rebounds, the number of people enrolling in Community Colleges for shorter, two-year courses, drops away, they said.

Having grown rapidly around the turn of the decade, Pearson issued the series of profit warnings in the last two years as it restructured to focus on digital services and emerging markets.

However the strategy has also been set back by slowing economic growth in countries such as Brazil, South Africa and China.

Pearson’s latest profit warning on Oct. 21 was partly caused by unexpected cutbacks on textbook spending in South Africa, for example.

Acquisitions…

The company could yet reduce its costs further after the major restructuring, but recent disposals, including the Financial Times, should enable it to protect its dividend.

“It has been pretty miserable being a Pearson shareholder recently,” said Richard Marwood, senior investment manager at AXA Investment Managers, one of Pearson’s top-40 shareholders.

“Some of the cash might be used to make acquisitions – and in the current low interest-rate environment it would be hard to make an acquisition that was not EPS (earnings per share) accretive. Pearson has considerable uncertainties, but looks quite cheap and is not without options.”

Analysts said the drop in the company’s share price fall has in part been due to the lack of visibility about the group’s operations. Any write-downs on the value of the firm’s assets may also indicate a declining level of confidence in the future growth rate of the business, they said.

Fallon oversaw the departure of several senior executives after he became CEO at the start of 2013.

With a new finance chief in place – 41-year-old Coram Williams took the job in August – and chairman Taurel taking over in January, analysts say it is important for the CEO and his senior team to remain to get the group back on track.

Could Hillary Clinton Help?

But Fallon needs a lucky break, and ideally in the United States, said Robin Milway, head of equity research at New Capital, a unit of EFG Asset Management: “For the stock to start working again, it needs a positive tweet from Hillary (Clinton) about the need for more digital education,” he said.

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