Over the last couple of years, Pearson plc has been a thorn in the portfolios of celebrated fund manager Nick Train – but he still believes the company will succeed. ‘It has been a source of considerable bother for longer than I care to consider,’ Train said this week at a Frostrow Capital investment seminar.
Since 2013, the 174-year-old British education publishing company has struggled to adapt to the shift to digital technologies and had to issue a string of profit warnings. As a result, its share price fell by some 30 per cent in 2017.
In 2015, it sold its best-known assets, the Financial Times and the Economist, to generate cash. Last year, it sold a 22 per cent stake in book publisher Penguin Random House.
Is Pearson set for a meaningful turnaround now? Shares in the company have risen by 23 per cent since the start of the year. But the company has cut its final dividend for 2017 by 65 per cent.
The reason for Train’s continued faith in Pearson is that he believes its transition to a new business model will prove to be a success. He said: ‘Very soon people will stop thinking of Pearson as a textbook company and will start thinking of it as a technology company – that’s the essence for why we’ve been invested for too long – but that’s still the potential in our opinion.’
He said that when he took on a new client with a segregated account in the UK recently, he weighed up whether to put new money into the stock. ‘It’s one thing if you have owned something for years, it’s another if someone gives you a pool of cash. Do you actually commence the holding?’ He decided yes, Pearson was still a buy.
‘There are encouraging indicators of growing traction from Pearson’s software services,’ Train said.
‘The shares are still valued on about 1.5 times annual sales. If this were perceived as a tech-driven growth business, it would be valued at 3-4 times sales – so there is significant upside.’
Train concluded that looking at the market, ‘technology is what’s changing prices at the moment. That’s what we need to spend our time considering: whether technology is going to dismantle or enhance a business.’
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