Is Pearson a Good Investment Right Now?

Pearson PLC (PSO)Is Pearson a good investment right now? Pearson PLC (NYSE:PSO) is one of the largest educational and consumer publishing companies on the markets today, producing textbooks used in classrooms around the globe, and overseeing the Financial Times publication. In addition to these ventures, Pearson has also recently established a for-profit college in the UK, called Pearson College, that will offer authentic degrees via Royal Holloway, a constituent of the University of London. As the company’s e-slogan claims – “Study Business in a FTSE 100 Company” – Pearson College will give upper-level students the option to partake in an internship at industry-leading organizations like the Peter Jones FoundationAtos, CiscoSony Pictures Entertainment, and regional telecom provider BT

While we can still guesstimate exactly how profitable Pearson College will be, another more recent development may be herding the bulls into this stock, so to speak. As we discussed here on Insider Monkey last week, Pearson and Bertelsmann A.G. agreed to “combine their book-publishing operations, Random House and Penguin respectively, in a joint venture, to be called Penguin Random House.”

As expected, there is a lot of excitement surrounding this deal, as the Wall Street Journal estimates that Pearson and Bertelsmann will now control “roughly a quarter of global English-language consumer book sales,” adding that the companies will be able to engage in substantial cost sharing, while expanding their footprint in the e-book realm. Moreover, Pearson and Bertelsmann will see added benefits in the digital marketplace as a result their settlement with Google Inc (NASDAQ:GOOG), which according to the New York Times, will “allow publishers to choose whether Google digitizes their books and journals,” adding that “under the settlement, publishers get the benefit of Google digitizing out-of-print books that they might not otherwise have turned into e-books.”

From an investor’s point of view, the markets haven’t been overly excited, but still positive, as shares of Pearson PLC have returned a shave under one percentage point since the joint venture was announced. Since the start of the year, the stock has been a decent investment, returning 6.6%. This is, however, below the publish industry’s year-to-date average (15.8%), and peers like The McGraw-Hill Companies, Inc. (NYSE:MHP)Reed Elsevier NV (NYSE:ENL)Scholastic Corp (NASDAQ:SCHL), and diversified media competitor News Corp (NASDAQ:NWSA). Here’s a graphical look at how investors have fared in Pearson, and the rest of its publishing brethren in 2012.

PSO Total Return Price Chart

PSO Total Return Price data by YCharts

As can be probably expected, shares of Pearson are trading at rather attractive valuation metrics at the moment. From an earnings standpoint, even though the company has seen its bottom line grow at an astounding rate of 48.3% a year post-recession, it still trades at a discount of more than 35% below the industry average. Specifically, Pearson sports a P/E of 10.4X, while the publishing industry’s norm is a shave above 16.0X, and competitors like McGraw-Hill (18.9X), Reed Elsevier (13.9X), Scholastic Corp (10.5X), and News Corp (54.36X) are all more expensive.

This undervaluation comes shortly after the Motley Fool originally reported that Pearson expects to finish 2012 with earnings of 84.9 pence per share, roughly an EPS of $1.35-$1.36 by today’s GBP to USD conversion rate. If this guidance holds, the Fool says that it “would be broadly in line with the consensus of current market expectations,” with growth supported by publishing sales and surprisingly, the Financial Times. Over the longer term, sell-side analysts are expecting Pearson to expand its EPS at a modest rate of 6.5% a year over the next half-decade, which is above what is expected of Reed Elsevier (6.2%), but below McGraw-Hill (12.7%), Scholastic Corp (9.1%), and News Corp (15.9%).

Intriguingly, it looks like investors are slightly undervaluing Pearson’s growth prospects, which can be seen by using the PEG ratio. Normalized for growth, the company’s stock currently sports a PEG of 1.62, which is below Reed Elsevier (2.23) and News Corp (3.41) quite handily. Mc-Graw Hill (1.49) trades much more in line with Pearson, and only Scholastic Corp (1.15) looks to be substantially cheaper at the moment.

In the hedge fund industry, Pearson’s two biggest bulls are Louis Navellier and Jim Simons, with the latter owning 25,800 shares to Navellier’s 11,319. Here’s a longer look at Simons’s 13F portfolio, and here’s Navellier’s 13F. While these money managers’ interest in this stock isn’t world-beating, it is still worth taking account of. Fresh off a major merger, Pearson looks to be a decent value-play at the moment, with an earnings valuation below most of those in its industry, and an ace in the hole with regard to its higher education prospects. The company’s expected EPS growth isn’t going to turn any heads, but we still have yet to view all of the details regarding its deal with Bertelsmann A.G. As long as the anti-trust regulators stay away, there can be moderate upside to be had from today’s price levels.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!