Investment Column: Pearson expands education sector empire
Ashtead; Carphone Warehouse
Wednesday 19 January 2011
Our view: Buy
Share price: 1006p (+5p)
Oscar Wilde once said: "Nothing that is worth knowing can be taught." The UK-based group Pearson would disagree. While Joe Public may associate the blue-chip company with its Penguin and Financial Times brands, its big business is education, and yesterday it further expanded its empire.
The world's leading learning com-pany has paid $127m (£80m) to lift its minority stake in the Indian education group TutorVista to 76 per cent. The Bangalore-based group supplies 3,300 classrooms in private and government schools in India with digital content and technology. TutorVista also offers online tutoring, principally in North America, test preparation and teacher training.
Education is a fast-growing market in India, where the government invests $40bn a year, a sum matched by consumer spending on private education. This is only going to increase after the government committed to improve access to learning opportunities across the country. Pearson has set out its stall to follow this and other opportunities in growth markets including Brazil, South Africa and China. The shift has been especially stark since early last year when it sold out of IDC.
In the last full financial year education made up 67 per cent of the group's revenues, dominated by its operations in North America, but this is likely to rise further. In the past five years, international sales have grown at a 17 per cent compound rate.
The group is set to release a full-year trading update today, which is expected to be pretty solid. Yesterday's acquisition is small in terms of the cost but reaffirms the drive into the emerging markets, and investors can expect a few more deals to come.
The UBS analyst Alastair Reid has the stock on a price of 13.6 times estimated full-year earnings, and with a yield of 3.8 per cent we would recommend having the stock in a portfolio. Buy.
Our view: Buy
Share price: 170.3p (+11.1p)
It has been a rollercoaster week for Ashtead, the equipment hire group. On 13 January, the FTSE 250-listed company joined forces with Belgium's TVH to make a bid for rival Lavendon. Solidly rebuffed on the question of price, Ashtead's shares soared by 11.1p yesterday on the news it was walking away from the deal.
But the real story with Ashtead is on the other side of the pond. Trading as Sunbelt Rentals (rather than under the A Plant brand used in the UK), the company already draws 80 per cent of its revenues from the US – and the growth potential is vast. Whereas hiring accounts for about three-quarters of construction equipment in the mature UK market, in the US – where the market is potentially five times the size – the proportion is a mere 40 per cent. But it is growing fast, helped by wary post-recession construction groups choosing to hire rather than buy, and each percentage point increase adds an eye-watering $700m (£440m) to the size of the market.
The Lavendon deal did make some strategic sense for Ashtead, but the group should concentrate on its US business. The stock has already more than doubled in price since October. The trend will continue. Buy.
Our view: Buy
Share price: 389.25p (+4.25p)
Carphone Warehouse's decision to demerge from its Talk Talk broadband division in March 2010 increasingly looks inspired. While shares in Talk Talk have risen sharply, they have more than doubled at Carphone Warehouse since it started trading as a separate entity at 135p last March.
Carphone is effectively 50 per cent of Best Buy Europe, including Best Buy, Carphone Warehouse and The Phone House branded stores in the UK and Europe, as well as a profit-sharing agreement in Best Buy Mobile US. Yesterday it said it expects full-year earnings to be at the top end of expectations, driven by a strong performance on both sides of the Atlantic. CPW Europe dialled up a 0.7 per cent rise in underlying sales, helped by a 2.3 per cent jump in UK like-for-like sales. There was no whining about snow.
Best Buy Mobile US also rang up 33.6 per cent growth in connections to 2.2 million, leading the group to raise guidance for its full-year profit share. It also plans to ramp up US store openings over the next two years.
Carphone Warehouse looks pricey on nearly 22 times forecast full-year earnings and, on this basis, cautious investors may want to hold. But we think there's value in buying into a growth company. Buy.
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