John Lambert presented his in-depth investment thesis on Pearson (NYSE: PSO) at Best Ideas 2016.
Pearson is first and foremost a contrarian, turnaround situation. The market has lost faith in its ability to deliver consistent earnings growth, and there have been a number of disappointments in recent periods. This has driven a halving in the share price in under a year, and an associated de-rating to the point where the company now looks almost as lowly valued as it ever has (on 11x 2016E P/E and a dividend yield of 7.4%). The company has suffered from a series of external events that have impacted performance, most notably cyclical effects in the U.S., slowing growth in emerging markets and policy changes in the UK. Despite this, it still earns operating margins well in the double digits, plus the impact of all three should ameliorate in due course. They have also spent considerable sums on restructuring, which is yet to show any real benefit. Moreover, further spend is potentially required, with a specific focus on a significant rationalization of their legacy technology systems. However, it is also a long-term play on growth in the global education market which is a very attractive, albeit fragmented, market. OECD countries spend 5+% of GDP on education, on average, and there is an increasing need for less developed countries to increase investment in education should they want to grow their productivity in the long term. Developed countries, on the other hand, are under intense pressure to improve outcomes with equal or fewer resources, which plays very well into Pearson’s digital and services focus. This sums to global spending on education of something like $4-5 trillion annually. There is a long runway for growth should they get it right. Pearson has slimmed down considerably over the last decade, and is now a pure-play on education, selling almost all its non-education businesses. In this market, it is a clear industry leader and has a strong balance sheet. Over the medium term, it has the opportunity to conduct bolt-on M&A, thereby supplementing organic growth and accelerating the shift to a fully digital business model. While earnings momentum is still negative in the short term, leading to questions over the level of the dividend, there is considerable upside when considered over a longer timeframe.
About the instructor:
John Lambert has 13 years of investment experience and is currently an Investment Manager at GAM supporting Andrew Green on global and UK equity funds. Prior to joining GAM in August 2007, Mr. Lambert spent six years as a pan-European investment analyst at Gartmore Investment Management. Prior to that, he worked as a UK equity analyst at M&G and a commodity trader at Cargill. Mr Lambert holds a BA (Hons) in Economics with Russian from Exeter University and is a CFA charterholder. He is based in London.
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