Investment Column: Scardino's grand vision is blurry

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The Independent Online
Marjorie Scardino, Pearson's new chief executive, has outlined her grand vision for the future. She wants to achieve double-digit earnings per share growth every year and to double the value of the company over the next five years, no less. That looks easier said than done.

For a start, despite years of reshaping, Pearson remains a sprawling conglomerate spanning leisure businesses such as Madame Tussauds and Alton Towers, a plethora of TV and publishing interests and even an investment bank, Lazards. The synergies between these businesses appear few and far between and Pearson continues to be run more like a quasi-investment trust than an actively managed company.

Ms Scardino's answer is to overhaul Pearson's structure and integrate the remaining businesses. But specific plans are thin on the ground. Businesses will go, although she will not say which ones, and acquisitions are on the cards, although she will not say where. Ms Scardino will also have her work cut out to address Pearson's poor margins. In all of its three main divisions, information, education and entertainment, Pearson's margins are at least five percentage points below its peers.

That said, Ms Scardino has got off to an encouraging start. Pre-tax profits for the six months to June have jumped from pounds 30m to pounds 81m. The figures were muddied by pounds 18.6m worth of write-offs last year at Mindscape, Pearson's troubled US software business, and this year by start-up losses at Channel 5, in which Pearson has a 24 per cent stake, and a pounds 5.9m hit from the strong pound.

Even so, underlying operating profits almost doubled to pounds 65.5m from pounds 33.5m, thanks to a stonking performance from the Financial Times. The pink paper's circulation is up and it plans to capture a chunk of the US market.

Of course Pearson still has more than its fair share of problem businesses. Mindscape, its most disastrous acquisition of recent years, is still losing money hand over fist and a fraud unearthed this year at Penguin's US publishing division will cost pounds 100m. However both these potential disasters appear to be under control. Mindscape could make a profit in the second half and Penguin's new management has swung into action to limit damage.

Ms Scardino's confident statement helped push the shares up 26.5p to 692.5p yesterday. Analysts forecast current year profits of around pounds 300m, putting the shares on a prospective p/e ratio of 19. It is difficult to value Pearson until more of Ms Scardino's plans are known. If Pearson can meet her targets, the shares look cheap. But until her new strategy becomes clearer the shares remain fairly priced for now.