Pearson faces questions over strategy as shares fall further

By Paul Sandle

LONDON, Oct (HKSE: 3366-OL.HK - news) 22 (Reuters) - Shares (Berlin: DI6.BE - news) in Pearson (Xetra: 858266 - news) fell a further 8 percent on Thursday, taking the total wiped off its market value in two days to 2.2 billion pounds ($3.4 billion), as analysts said the education company could need to overhaul its whole strategy.

The British company on Wednesday shocked investors with a warning that profit would come in at the lower end of guidance after sales went into reverse in the third quarter - the key period for an education business.

Having grown rapidly around the turn of the decade, Pearson (Amsterdam: PR8.AS - news) issued a string of profit warnings in the last two years as it restructured to focus on digital services and emerging markets. Recent results had shown signs of improvement, making Wednesday's warning all the more damaging.

The shares tumbled on the day by 16 percent, on an earnings downgrade of just over 3 percent. Analysts at Bernstein said investors were starting to question whether management had a grip on the business, and it was time to reassess its strategy.

Pearson is focused on education after agreeing to sell the Financial Times newspaper and its stake in the Economist, and it says the industry has bright long-term prospects as more students go into higher education worldwide and digital learning grows.

However, the move has left Pearson at the mercy of the political and economic weather. In South Africa the group was hit by an unexpected reduction in the purchase of textbooks.

In the United States it has been caught up in the row over the introduction of common teaching standards, known as common core, while an improvement in the economy means more people enter the jobs market rather than go to college.

"If the U.S (Other OTC: UBGXF - news) . economy stays healthy, with continued low employment rate, a recovery in enrolment in education could be years away," Bernstein said.

Chief Executive John Fallon told Reuters the problems were cyclical, and the long-term structural drivers for education were intact.

Analysts, however, said one of the most concerning aspects of the downgrade was how little visibility the company had, with no indication given at its first-half results three months ago.

Barclays (LSE: BARC.L - news) said some of the company's problems could be structural.

"In media we have seen whole segments eaten up by structural challenges," they said. "This never starts with a broad agreement that structural pressures are impacting, it starts with a weak print that is hard to explain."

They said the market would start to "turn up the noise" on structural risks such as the threat from lower pricing in digital markets, the availability of free online resources and piracy of content.

Price targets for Pearson's shares were downgraded by a swathe of brokers on Thursday, including Bank of America (Swiss: BAC.SW - news) /Merrill Lynch, Nomura, Barclays and JP Morgan.

The stock was trading at five-year lows on Thursday, down 6.2 percent at 936.5 pence at 1357 GMT, giving the group a market capitalisation of 7.6 billion pounds.

($1 = 0.6489 pounds) (Editing by Mark Potter)