Kobus Louw
Elevator Pitch
Pearson plc (NYSE:PSO) [PSON:LN] is still rated as a Buy.
With my earlier November 15, 2023 write-up, I analyzed Pearson’s share buybacks and its Assessment & Qualifications segment. My focus is on PSO’s full-year FY 2023 earnings preview and its FY 2024 outlook in the current article.
I think that Pearson’s FY 2023 results announcement in March will meet the market’s expectations, taking into consideration its latest trading update and the recent changes to consensus numbers. I also see PSO recording a decent set of results for the current year based on a review of relevant operating metrics and corporate disclosures. Therefore, I leave my Buy rating for Pearson unchanged.
2023 Financial Results Preview
Pearson is expected to announce the company’s full audited financial results for fiscal 2023 on March 1, 2024.
The company’s unaudited 2023 trading update issued on January 17, 2024 before trading hours, and the subsequent revisions to the consensus financial forecasts offer relevant read-throughs for PSO’s financial results announcement that will be released at the beginning of next month.
As per its 2023 trading update published in the middle of last month, Pearson achieved headline revenue growth and core top line expansion (adjusted for businesses divested and discontinued operations) of +1% and +5%, respectively in the most recent fiscal year. PSO also indicated in its trading update that its normalized operating income jumped by over +30% to between £570 million and £575 million in FY 2023, which translated into a +15.5% operating margin.
The latest numbers disclosed as part of the 2023 trading update are as good if not slightly better than PSO’s earlier financial guidance. At the end of October last year when Pearson revealed its 9M 2023 financial metrics, the company guided for “the higher end of the low to mid-single digit” percentage revenue increase and an operating profit margin at the “mid-teens” percentage for full-year FY 2023. The company’s unaudited 2023 financial numbers point to an operating margin of +15.5% and a normalized top line growth of +5% as highlighted above.
Also, the changes made to the consensus FY 2023 bottom line projection for Pearson were insignificant. In specific terms, PSO’s consensus FY 2023 statutory earnings per share or EPS estimate was lowered by just -0.4% (source: S&P Capital IQ) after January 17, 2024. In other words, the issuance of the unaudited FY 2023 trading update last month didn’t change the market’s expectations of Pearson’s actual audited full-year results for FY 2023 in a meaningful way.
Taking into account the numbers and analysis presented above, I think it is pretty reasonable to assume that there won’t be any major negative surprises in store for investors when PSO reports its full-year audited financial results on March 1, 2024.
Key Metrics And Disclosures Point To A Favorable FY 2024 Outlook
The current consensus sell-side analyst financial estimates for PSO suggest that the company’s financial prospects for the current fiscal year are healthy. Specifically, the market sees Pearson’s EBIT and normalized net profit growing by +7% and +12%, respectively in FY 2024. PSO’s normalized operating margin is also forecasted to improve from 15.5% in FY 2023 to 16.4% for FY 2024 as per the consensus financial projections.
There are a few metrics and disclosures that indicate that Pearson is likely to do pretty well in the new fiscal year.
Firstly, the overall user base and paid subscriber numbers for Pearson+ have been growing at a rapid pace. In tandem with its 2023 trading update release, PSO also published a data sheet for FY 2023. As indicated in the data sheet, the growth in the total number of users for Pearson+ accelerated from +3% for FY 2022 to +7% in FY 2023. The proportion of paid subscribers as a percentage of total users also grew from 13% in FY 2022 to 17% last year.
I previously highlighted that Pearson+ is a “new digital college textbook platform” that can enable PSO to “grab market share back from the secondhand textbook market” and also help the company to “cross-sell its other digital products” in my October 2021 update for PSO. As such, it is a positive sign that Pearson+ has been gaining traction, which bodes well for the company’s 2024 prospects.
Secondly, PSO is doing well in capitalizing on AI-related growth opportunities.
In its 2023 trading update issued on January 17, 2024, Pearson revealed that it is “encouraged by how students are engaging with our generative AI study tools and will be expanding the current beta to many more MyLab & Mastering titles by Fall semester 2024.” PSO had noted at its 1H 2023 results briefing in July last year that it is “now working on adding generative AI to our products across the company.”
The recent addition of AI tools for the company’s digital learning platform MyLab & Mastering have been well-received. Therefore, it is realistic to be optimistic about how PSO’s future user engagement and financial performance could potentially benefit from the rise of AI.
Thirdly, Pearson continues to buy back its own shares.
PSO disclosed in the company’s 2023 trading update that it has completed around 69% of its £300 million share repurchase plan by mid-January 2024. This buyback program began in the third quarter of 2023, so it is impressive that Pearson has spent more than £200 million (about 2.4% of its current market capitalization) on share repurchases in six and a half months.
As per the market’s consensus financial figures taken from S&P Capital IQ, the sell side expects Pearson’s ROE to improve from 8.5% last year to 9.5% this year and anticipates that the company’s bottom line will grow by +12% in FY 2024. PSO’s continued share buybacks will help to shrink the company’s equity base, which will have a positive impact on the company’s ROE and EPS in the current fiscal year.
Final Thoughts
I maintain my Buy rating for PSO. Pearson is currently trading at 14.8 times (source: S&P Capital IQ) consensus FY 2024 normalized P/E, which translates into a capital appreciation potential of +20% assuming PSO’s P/E multiple expands to its historical three-year P/E mean of 17.7 times. After previewing its 2023 results release and assessing the company’s 2024 financial prospects, I am of the opinion that it isn’t demanding for Pearson to be valued by the market at a higher P/E ratio closer to its historical average.
