FTSE 100 incumbent Pearson (LSE:PSON) has seen its share price drop by 25% in the past six months. Could now be a good opportunity to pick up cheap shares for my portfolio or should I steer clear?
Publishing and education
Pearson is best known as a publishing house; however, the business comprises three main divisions. These are education, Financial Times, and Penguin. In fact, two-thirds of its revenue is derived from its education arm. With a presence in over 200 countries and approximately 20,000 employees, Pearson is a global firm with a vast reach.
As I write, shares in Pearson are trading for 631p, which is 25% less than in May when shares were trading for 843p. A year ago, shares were trading for 655p, which is a drop of 3% compared to current levels.
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I believe the Pearson share price has dropped off, especially recently, due to a mixed trading update and a pandemic-related hangover. This update also revealed growth is slowing for the company, which may have spooked investors, driving down the share price.
Trading update and looking ahead
Pearson’s trading update, released on 15 October, resulted in a 15% share price drop the same day. The update covered the nine months ending 30 September 2021. Some positives were that revenue for the period increased by 10% compared to the same period last year. This was primarily driven by its virtual learning and assessment divisions. In addition to this, Pearson recently launched its own app, called Pearson+. The app allows US students to access its educational content for $14.99 a month and there are already over 2m sign-ups.
The other side of the coin for Pearson that emerged from this update was the fact that growth is actually slowing down. Higher education sales declined by 7%. This is most likely in part due to the US’s decline in enrolment figures. Lower student numbers means fewer customers to sell to. Furthermore, the Pearson+ app may have over 2m sign-ups, but only 100K are paying the subscription fee mentioned. The remainder are signed up via bundles and offers with other services.
Better FTSE 100 opportunities
I understand that the pandemic has affected student numbers and new applications for places. With reopening in full effect, there is the chance things could return to normal sooner rather than later. In fact, Pearson has decided to maintain its guidance for full-year results, which tells me it believes the same.
Overall, I would not buy shares in Pearson right now despite the cheaper share price. I’m put off by the current market challenges linked to the pandemic and falling student numbers, as well as the shift to its application, which is a new product with little history to reflect on. In addition, its historic track record shows me revenue has been declining year on year for a few years now. I understand that past performance is not a guarantee of the future but I use it as a gauge when reviewing investment viability.
I will keep an eye on developments and perhaps full-year results may lead me to reconsider my position. For now, I believe other FTSE 100 opportunities are better placed to boost my portfolio.
