Can Pearson (PSON) ever regain its blue chip status?

What is going to happen to Pearson, the former blue chip text book publisher, which has been struggling for years to reinvent itself for the new digital era? The question is prompted by last Friday’s RNS announcement that Lindsell Train, Pearson’s biggest and loyalest shareholder, has begun to run down its stake.

Between 2017 and 2020 Lindsell Train had more than doubled its stake in Pearson, and Nick Train (of Lindsell Train), one of the City’s smartest fund managers, has stuck by the company through thick and thin as the company tried to transform itself from a traditional printed text book company and into the world’s leading digital learning company.

Andy Bird, an ex-Disney exec who took over as Pearson’s ceo in October 2020, is hoping to do for education what Spotify did for music and Netflix for films. He notes that global learning is a vast and growing market currently worth around £5trillion, and only 3% is digital.

For years the traditional education textbook market was dominated by three players – McGraw-Hill Education, Thomson Learning and Pearson. The first two have been swallowed up by private equity investors. Pearson, the market leader, has occasionally been touted as a potential takeover target because of its failure to stem the decline in its core US textbook business which triggered seven profit warnings in as many years as new and nimbler competitors moved onto its education patch.

The key to Bird’s turnaround strategy is Pearson Plus, a new mobile app which allows students to read Pearson’s textbooks on line for a monthly subscription fee. Bird calls it Pearson’s “flagship education product” which will “fundamentally change the way students access textbooks”.

However, Pearson faces serious challenges from newcomers such as Chegg, a US listed online learning company. In terms of revenues Pearson is eight times the size of Chegg but its margins are a fraction of Chegg’s and the latter’s market capitalisation is now 40% bigger than Pearson’s.

At Pearson’s current share price of around 770p, it is selling on 23 times 2021 earnings and offers a prospective yield of 2.6%. The question for investors is whether Pearson’s long overdue recovery is finally starting to happen, which could trigger a substantial rerating of its shares, or whether it has come too late to the digital game and forfeited its dominant market position - the key to its past superior profitability.

As a long-term shareholder in Pearson (including subscribing at £10 a share to Pearson’s £1.7bn rights issue in 2000!!), and no expert in the US education business, my continuing holding of the company’s shares has been rather naively underpinned by a couple of things – Pearson’s seemingly well qualified board of non-exec directors, who own £3m of shares, and the continued loyalty of its biggest shareholders. Lindsell Train, Schroders and Silchester control just under a third of the equity worth £1.8bn.

Nick Train, who is a long term buy and hold investor, has said in the past that Pearson could well turn out to be one of his rare investing mistakes. His firm’s decision to start trimming its stake suggests that one of Pearson’s loyalest shareholders may be starting to lose faith in the company’s recovery prospects.

About a year ago I was unnerved to read a comment by Malcolm MacColl, Baillie Gifford’s new joint senior partner who also manages Monks Investment Trust, saying that companies like Pearson which have served the higher education market over the past couple of centuries are now just as vulnerable to disruption as record shops and video rental stores were at the turn of the millennium.

He may be talking his own book, since Baillie Gifford is Chegg’s biggest shareholder with a 13.1% stake. But the combination of Baillie Gifford’s backing of a successful competitor like Chegg, and Lindsell Train starting to trim its stake in Pearson, is undermining my confidence for remaining a long-term Pearson shareholder.

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Hi DarwenLad,

Many thanks for the great post. I have never looked at Pearson before.

I believe most investors put their faith in the executives rather than the non-execs :slight_smile: But the CEO and CFO have not been on the board for long, so the jury must remain out on their plans and talent. As such I would not say a clear recovery will be achieved soon.

Incidentally, I note the previous CEO was appointed in 2012 and had an early background in corporate communications and, when first starting at Pearson, was the director of communications. I just wonder if he was more of a ‘talker’ than a ‘doer’. Interpreting board CVs (correctly!) is I feel one aspect of investing that can put us one step ahead of the crowd.

PSON has 7 non-execs: Former CEOs of Eli Lilly and Allianz Global Investors, former CFOs of Unilever and ARM, the founder of Interactive Investor International, an ex-Yale Vice President and the present CTO of a technology start-up.

Two of them have connections with McGraw-Hill, so presumably they know more about educational publishing than the typical blue-chip non-exec. Total non-exec fees look to be approximately £1.1m a year (£500k for the chair, c£100k for the others), of which 25% is paid in shares, which may in part explain the collective £3m shareholding. Ultimately you have to think whether these 7 non-execs can really help Pearson sell more physical/online textbooks. The ex-Yale non-exec probably can. The others I am not as sure.

If you respect Nick Train’s investing ability, then one course of action could be to simply switch from Pearson and reinvest in his fund. That way you still get some exposure to Pearson, but do not need to worry as much about Pearson being disrupted. Otherwise, determining Pearson’s future I think really boils down to considering the new strategy and investigating the group’s main markets/what is happening with Chegg etc.

Maynard

Maynard, many thanks for your comments and useful advice. I must admit that my investment in Pearson (PSON) is the only share held for largely sentimental reasons. I know this is not a sensible excuse, but I used to work for Pearson and the shares were acquired over several years through a SAYE scheme, so am still in profit. In addition, as a Pearson pensioner I like to keep an eye on the fortunes of a company paying my pension.

I agree with your point about the greater weight investors should attach to the executive team as opposed to the non-execs. I always check the CVs of the top team before investing in a company, and if possible have a look at their previous careers

In the case of Andy Bird, Pearson’s new ceo and former chairman of Walt Disney International, for example, it is unclear whether he quit Disney in 2018 after being side-lined in a Disney management reshuffle. It was two years before he was appointed Pearson ceo.

According to a recent Sunday Times article (August 8, 2021) Bird thinks that Pearson is a “goldmine” perfectly positioned for a Disney style renaissance. By contrast, Nicole Allen, an industry analyst quoted in the same piece, describes Pearson’s whizzy new ap as simply replacing “one broken model with another”.

A look at the CV of John Fallon, Pearson’s previous ceo who presided over all those profit warnings, might also have raised alarm bells. He started out as a researcher for John Prescott, the former deputy Labour party leader, before spending over a decade in pr/investor relations.

His elevation to the top job at Pearson in 2013 was a surprise and seems to have led to the departure of Rona Fairhead, Pearson’s finance director, who went on to chair the BBC. I think Maynard is right in surmising that Fallon was more of a “talker” than a “doer” which may explain why he held on to his job for seven years.

Fallon left less than a year ago with Sidney Taurel, Pearson’s chairman, praising his “hard work and vision” which had “established the foundations for Pearson’s next chapter”. Given the impressive CVs of Pearson’s non-execs, it raises doubts about whether investors should ever take much notice about who sits on company boards and whether they are abiding by fashionable “good” corporate governance rules, as was certainly the case with Pearson.

However, I believe that the role of chairman is often under-estimated when assessing an investment, particularly when it is performing badly. A wise old fund manager once told me that a chairman’s most important power was to hire and fire the ceo. Some of the blame for Pearson’s poor performance should be laid on Pearson chairman Sidney Taurel, who is paid £500,000 a year, for failing to change the company’s top management quickly enough.

Taurel, 72, announced in April that he is stepping down before the next AGM after 5 years in the role. Clearly it is taking time to select a new chairman for Pearson which suggests that the company might be finding it harder to attract a supposed “top quality” candidate than it has done on in the past.

It is always hard for small investors to judge the quality of chairman and chief executives they do not know, unlike the institutions which have much easier personal access to them. It is the main reason why I am a fan of attending AGMs. They give a small investor a chance to question the chairman and ceo and look them in the eyes.

Finally, in response to your suggestion about selling Pearson and reinvesting the proceeds in Nick Train’s Finsbury Growth and Income Trust. It makes sense. Most of my investments are already in investment trusts (I hold Finsbury Growth and Monks, which gives me an exposure to both Pearson and its competitor Chegg).

I have also recently increased my stake in Simon Knott’s Rights and Issues Investment Trust (RIII) because he invests in several of the under-researched small cap companies, such as Hill & Smith, VP, Renold, Colefax, Vitec, LPA etc, which I have occasionally looked at with a view to investing. Knott has the patience and knowledge that I lack, and his trust’s shares are trading at a 12% discount.

Apologies for rambling on. But wanted to explain why I am still holding on to Pearson shares when they should have been sold years ago. Thanks again for hosting a very good discussion forum. It is much appreciated.

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