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I Pearson (LSE: PSON) share price is up 15% so far in 2024. And it had a nice boost from the Q3 update on Tuesday (October 29).
CEO Omar Abbosh told us that “our focus on operations and financial performance drove growth across all segments this quarter and we are on track to meet expectations for the full year.“
Shares in the education and publishing giant gained 3% in early trading, with the price up 5.8% from last Friday’s close.
What you can watch
The company expects to beat market expectations for the full year. That suggests around 55.8p in earnings per share (EPS), and a price-to-earnings (P/E) ratio of 19.7.
Forecasts show more than 67p in EPS by 2026, reducing the P/E to around 16.
The dividend yield forecast is only 2.2%, rising to 2.6% based on the 2026 forecast. Investors seem unlikely to view Pearson as an income stock. At least, not in the short term.
But EPS looks to cover dividends around 2.3 times over the next few years. So there may be room for future profit concentration if the company’s profit growth plans turn out well.
Strong cash flow
Pearson reported 3% sales growth in the first nine months. And it appears to be on the rise, with a 5% increase in Q3. But how can it evolve into things that fold?
For the full year, the board expects a cash flow turnaround of 95%-100%. That’s one of the things I look for in a dividend stock, even if the current yield is low.
Many companies have recorded what appears to be very good earnings over the years. But not all were able to convert enough into real money. And shareholder income has been disrupted over the long term.
Pearson has completed its £500m share buyback, which includes 7% of the issued shares. That’s an important part, and should hopefully provide an improvement in the importance of future steps for each share.
AI in education
My main concern at the moment is the very high rating. And it’s time for more FTSE 100 the shares still look very cheap, with a lot of great upside all around.
I’m also thinking about artificial intelligence (AI), which Pearson uses a lot. To me, it feels like a double-edged sword.
Company “to scale AI across our products and services,” and spoke of “double-digit year-over-year credit growth in Higher Education products with AI learning tools.“
That sounds good, and this looks like a business where AI could really have a big impact. But at the same time, are investors buying because of the talk of AI? And maybe raise the price a bit?
On the phone
Pearson is in a very competitive market. And cheap (and free) AI learning tools can still throw a spanner in the works.
But, I think Pearson’s whole contribution is more than the sum of its parts. And we were seeing a growing competitive advantage. I’m not ready to buy, but I’m looking (and thinking).
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