Yahoo Finance Market report: City throws book at Pearson as broker dubs it ‘diseased’
Textbook publisher Pearson was back in the City’s bad books today after another broker tore apart the investment thesis, calling the business a “diseased body”.
Hopes have been rising that the Footsie firm, which shocked the market with a huge profit warning last month, could unveil a major cost-savings drive when it reports annual results on Friday.
But in an explosive note, Berenberg’s scribblers poured cold water on what it called “misplaced optimism” on restoring profitability.
They do not see any opportunities for major savings, arguing that Pearson would only be able to cut sales jobs.
“With no easy cost savings, relatively high leverage, and no potential to sell a cleaned-up Pearson to a competitor, we think private equity will steer clear,” analyst Sarah Simon added.
Nor does she think a break-up is a solution. “The problem is that so much of group profit is declining. This is not a case of cutting off a diseased limb: it is a diseased body,” she said.
Some in the City think Pearson could cash in on a sale of its 47% stake in Penguin Random House. However, Simon believes it would not return any cash to shareholders after “recent negative statements” from ratings agencies Moody’s and S&P.
She slashed her target price from 500p to 400p, causing shares to dive 27p or 4% to 641.5p.
Pearson’s slump was outdone only by that of Unilever, which swiftly reversed its gains on Friday when Kraft Heinz’s $143 billion (£115 billion) approach emerged.
The duo’s respective declines were enough to keep the FTSE 100 in the red. The blue-chip index started the week down 0.29 points at 7299.67.
Rolls-Royce charged up 28.65p, or 4.3%, to 694.65p after an upgrade to Buy from Goldman Sachs, which said improved earnings would help the engineer boost free cashflow from £120 million this year to £1.55 billion in 2020.
Investors dialled into BT, which climbed 4.65p to 320.75p on rising hopes that a deal with Ofcom over Openreach could be in the offing.
Car insurer Direct Line raced ahead 11.1p to 365p after saying that new rules to determine lump-sum payouts for personal injury claims would have less impact than initially thought.
Away from the top flight, Essentra fell 15.11p to 469.29p as investors took profits after Friday’s surge — which came despite a profit warning from the specialty parts-maker.
