Pearson has its problems

INVESTMENT COLUMN
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The Independent Online
Shares in Pearson, the publishing-to-media conglomerate, were hit by a double profits downgrade yesterday, taking the shine off a strong run since the middle of May.

The group saw more than 3 per cent knocked off its market capitalisation, and there could be more damage to come, as other analysts pore over their own estimates.

The two brokers responsible for yesterday's run, Capel and UBS, had nothing to say. But it is believed as many as four other houses are ready to follow, reducing current estimates from about pounds 300m to pounds 270m, on fears of a weaker performance in US publishing, extra costs in the television sector, where Pearson is a relative newcomer, and some disappointments at Westminster Press, the company's slimmed-down printing operation.

While there are still a few bulls left, sentiment seems to be be running against Pearson. From about 640p earlier this month, the shares have dropped to under 600p, closing yesterday at 592p. At that level, with pre-tax profits estimates for this year down to pounds 270m, some analysts think the shares may still be too expensive, trading on a price-earnings ratio of 19.5 times.

The company was saying nothing yesterday, but a prime concern among analysts appears to be the US publishing company Addison-Wesley, which is highly dependent on the educational sector. According to some observers, current trading in the sector is weak, and there are worries that results for the second half of the year will be insufficient to offset a disappointing year to date.

That said, traditionally results can vary wildly between the first and second halves, depending on whether book publishers have produced best- sellers or non-starters.

The television sector may also be causing some problems. Pearson has made recent, and some say expensive, moves into broadcast, as part of its moves to reposition itself. As well as the independent television production companies, Thames and Grundy Worldwide, investments have included a move in Asia, a joint venture with the BBC to operate a cable channel, UK Gold, and two recently launched satellite services in Europe.

Investors may be right to be wary of these moves. A hodge-podge of television assets, along with the recently purchased games maker Mindscape, do not suggest a coherent strategy.

More to the point, if current trading conditions really are under pressure, the market may want to rethink the premium it is awarding the shares, even after yesterday's drop.

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