Monday, February 25, 2008

Pearson Isn't Making Web Education Trade Better Than Newspapers

Pearson Plc Chief Executive Officer Marjorie Scardino is selling newspaper assets and moving from textbooks into online courses. The efforts aren't bringing the 164-year-old publisher the valuation of Washington Post Co., whose shares cost 50 percent more.
The discount for the owner of the Financial Times is reflected in the current consensus among analysts. While 9 recommend buying the stock, 17 don't. The Washington-based publisher, whose biggest unit is Kaplan test preparation, trades at a price-earnings ratio of 21 times estimated 2008 profit, compared with 14 for Pearson and 13 for the Bloomberg Europe Media Index.

From May 14, when the 61-year-old Scardino paid $538 million for the online course offerings of, to Dec. 24, when she completed the sale of French newspaper Les Echos to LVMH Moet Hennessey Louis Vuitton SA, Pearson shares fell 18 percent. They have declined 10 percent more since then as the U.S. and U.K. economies have weakened, closing in London trading Feb. 22 at 669 pence ($13.16).
``It's true that education is more resilient than other media operations in an economic downturn, but even that business is not immune,'' Anthony De Larrinaga, a London-based analyst at Societe Generale who rates the stock ``hold,'' said in a telephone interview.
Scardino is using technology to beef up sales to schools and students as her biggest markets in the U.S. and the U.K. slow.
Margins Widen
Online courses and testing are 35 percent of revenue in education, the world's biggest textbook publisher's largest unit. Operating margins are estimated to have risen 3 points to 15 percent of sales in 2007, even as the shares dropped, contracting the price-earnings multiple. London-based Pearson's shares may gain 16 percent to 775 pence in 12 months, according to analysts' average estimate.
Moving products online improved profitability by cutting printing and shipping costs while increasing revenue from institutions trying to save money and better monitor students. Education profit margins rose to 14.1 percent in 2006 from 11.9 percent in 2004, Finance Chief Robin Freestone said in November.
U.S. college students using Pearson's online learning programs jumped 44 percent to 1.3 million this school year. Scardino said in October that 2007 sales of nurse-certification tests, graduate-school admissions and other career education services would gain as much as 10 percent.
The company, reporting results March 3, had record profit for 2007 on demand from nurses and improvements at the Financial Times and Penguin book publishing, Pearson said on Jan. 22.
$8.8 Billion
Scardino spent more than $8.8 billion buying education assets since 1997, including Simon & Schuster textbooks and Harcourt Education's international business. She sold Madame Tussaud's wax museum and a stake in television broadcaster British Sky Broadcasting Group Plc, and last month agreed to sell Pearson's 50 percent stake in the German-language version of the Financial Times.
The CEO's efforts have won praise from some investors.
``Pearson has made an impressive transformation in the last couple of years,'' said Tom Shrager, partner at New York-based Tweedy Browne Co., which manages $8.8 billion and bought 56,000 Pearson shares last year. ``We predict the market will increasingly give Pearson credit for it.''
Washington Post's Kaplan, which offers testing and operates schools, has almost doubled revenue in the past three years, insulating the company from declining advertising sales at the flagship newspaper and Newsweek magazine. The company bought 8.1 percent of Corinthian Colleges Inc. for $59.7 million, according to a regulatory filing on Feb. 15.
`Paid Off'
The expansion into education ``has definitely paid off'' for Washington Post shareholders, said James Peters, a New York-based analyst for Standard & Poor's. ``Investors acknowledge the growth potential of the education business and the shares trade at a significant premium'' to media stocks.
Pearson also holds that potential for Tweedy Browne, Shrager said. Existing shareholder Legal & General Group recently added 1.1 million shares, while Newton Investment Management bought 3.1 million, according to regulatory filings.
``Education is not as cyclical as the advertising-driven business models of magazines, newspapers and television stations,'' Shrager said.
Still, some analysts say that optimism is overblown.
Dresdner Kleinwort's Usman Ghazi, who has a ``reduce'' rating on Pearson, said the collapse of the residential real estate market in the U.S. may hurt funding for school textbooks, which local governments pay for using property taxes.
Scardino will also have to deal with News Corp.'s Rupert Murdoch, 76, who bought Dow Jones & Co. last year and plans to expand the Wall Street Journal outside the U.S., taking aim at the Financial Times.
Competition will increase, said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe. ``That shouldn't be a major concern for investors as Pearson's education unit has a much bigger impact on earnings and sales.''
Bloomberg LP, the owner of Bloomberg News, competes with Pearson in providing information to the financial industry.

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