UK Edition
Questor: Pearson has some searching questions to answer and could be a value trap. Avoid
Questor share tip: another profits warning shows its response to earlier ones was inadequate, so we were right to steer clear
The latest profits warning from Pearson, the educational publisher, plays straight into this column’s long-held bearish thesis on the stock.
A cost-cutting plan, asset disposals and share buybacks were the response to 2017’s profits warnings and dividend cut, but they still look like short-term fixes for a company that faces deep-rooted challenges.
We first took evasive action at 780p and see no reason to go near the stock now.
The problem is that Pearson’s US education business, which accounts for around a quarter of group sales, is disappointing once more. Sales of textbooks for students are now expected to drop by 8pc-12pc this year, rather than the 0pc-5pc range that management initially anticipated.
As a result, adjusted operating profits will now reach only the bottom end of the forecast range of £590m-£640m. The firm is offering little visibility on 2020.
The problems appear to be twofold. First, sales of printed books are falling faster than previously thought as students rely on second-hand copies or digital versions to cut costs. Second, Pearson appears to be losing share in the digital market.
Both developments compound the threat, acknowledged by the chief executive, John Fallon, in the update, of “open education resources”. These enable universities to make best-of-breed materials freely available so that other students and lecturers can copy, use and even modify the documents and thereby cut down on the expense of buying or renting the sort of textbooks provided by the likes of Pearson.
The company still has some searching questions to answer and although the forecast price-to-earnings ratio does not look high, the stock could yet be a value trap.
Questor says: avoid
Ticker: PSON
Share price at close: 738p
Update: PureCircle
Sweetener and sugar substitute provider PureCircle has been a disappointment to Questor, even if the shares initially flew to beyond 500p after our first look at 315p in May 2017.
Its decision to postpone publication of full-year results due last month only raised our concern that this one could leave us with a bitter taste.
The Malaysia-headquartered company said its auditors had raised questions over the valuation of certain items of stock and inventory and launched an investigation.
It is reassuring to hear PureCircle say that the aggregate amount involved could be no more than $30m (£24.3m), a sum that should have limited impact on the firm’s debt or cash generation. But as we have noted before in similar cases, health inspectors rarely find just the one cockroach and there seems little point in taking unnecessary chances.
If the accounts get the all-clear and are published quickly we can always revisit the stock, although getting customers to switch to the new version of its plant-based sweetener from the older, lower-margin one does appear to be taking longer than hoped. It is time to cut our losses and move on.
Questor says: sell
Ticker: PURE
Share price at close: 196p
Update: AG Barr
There is still work to do at Irn-Bru maker AG Barr, but last week’s interim results offered some support to our argument that the profits warning in July was no more than a blip.
The new figures lived down to low expectations set by the summer trading alert: an 11pc slide in sales turned into a 26pc profit plunge. But cash generation remains healthy and management’s decision to raise the interim dividend offers grounds for encouragement when it comes to new pricing and product initiatives.
- Read Questor’s rules of investment before you follow our tips
The strong balance sheet – there are net liabilities of just £14m once you adjust the cash pile for pension and lease liabilities – also means there is no time pressure on the turnaround.
This looks like an attractive entry point for patient contrarians. Keep buying.
Questor says: buy
Ticker: BAG
Share price at close: 579p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.