Pearson (LSE: PSON) shares have been climbing well since the 2020 stock market crash.
It hasn’t been easy though, as the publisher has been getting to grips with the changing nature of online education.
But with a full-year update just out, it looks to me like 2023 might have just been a transformational year.
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Strong 2023
On 17 January, we had news on how the year went. CEO Omar Abbosh spoke of “strong strategic and operational progress in 2023 leading to financial performance ahead of our initial expectations.”
We’ll have to wait for the full results. But the firm is talking of a 30% rise in adjusted operating profit, after underlying sales rose 5%.
That techie thing exciting so many people these days, artificial intelligence (AI), made its appearance as the update spoke of Pearson’s “generative AI study tools“.
Buzzword caution
I need to sound a caution here. We’ve seen a lot of stocks that have had even loose connections to AI being pumped up in the past year.
But it’s really not the brand new thing it might sound. Smart folk have been doing things that would now be thought of as AI for many years. But it seems it’s only recently that the term itself is being used everywhere.
I’m not knocking AI. Some truly impressive things are being done with it, and the pace is accelerating.
I just think investors need to understand exactly what a company is doing that it calls AI, and not just pile in regardless.
Next few years
With that aside, what might the next few years hold for Pearson? Forecasts show rising earnings over the next few years. And they put the stock on what looks to me like a fair valuation.
We see a price-to-earnings (P/E) of around 20, dropping to 15 by 2025. That might not sound too cheap, but Pearson has pretty low net debt. This latest news puts it at £0.8bn, with the update speaking of “a strong 2023 cash performance“.
We should have the full details on 1 March, and cash flow is the first thing I want to see.
Taking profit?
Saying all that, Pearson shares did dip a couple of percent in the hours after the update. And I think that might hint at a couple of things.
I suspect there’ll be some profit taking here, especially with the stock up 45% in two years. And if 2023 is in line with expectations, folks might be seeing the stock valuation as high enough.
There are, after all, many FTSE 100 stocks that look a lot cheaper right now.
I’m a bit cautious of the AI factor too. And when that shine wears off a bit, things might cool.
Long term
But Pearson looks to me like it could have a solid few years ahead of it now. Nothing too exciting, but slow and steady growth in earnings and cash flow. A lot of investors have got rich with stocks like that.
