Dame Marjorie in firing line as Dame Fortune sharpens her arrows

As Pearson keeps falling short of its own financial targets, Heather Tomlinson asks how long the media group's chief executive can carry on missing the bull's-eye

Marjorie Scardino may be a Dame, but she was born in Arizona and is a lifelong supporter of the Demo- crats. The political views of Pearson's chief executive have no doubt been hardened by the actions of George Bush's Republican administration, which has not been doing her media group any favours this year.

At Pearson's half-year results tomorrow, Dame Marjorie will reveal that revenues have fallen by as much as 10 per cent to £1.6bn, hit badly by the fall in the sterling-dollar exchange rate. Mr Bush's tax cuts and the American economic troubles are conspiring to hit Pearson's largest business, education software and books, which makes up 64 per cent of sales. Although schools and colleges are sometimes seen as reliable buyers, American states have struggled to balance their budget this year and their spending will be limited.

This suggests that Pearson will miss another of the targets set by its feisty chief executive, and the City is starting to lose patience with her habit of failing to meet the benchmarks she lays down herself.

Then, of course, there is the war in Iraq, which has prolonged the advertising recession at the Financial Times, the business newspaper that represents one of Pearson's other main legs. Tomorrow, Dame Marjorie is expected to report increased losses at the Financial Times and a swing into loss for the US schools business, according to investment bank Schroder Salomon Smith Barney.

At least the US President has not been able to affect another of Pearson's companies, Penguin, arguably the world's most famous book publisher and with modern-day authors ranging from Marian Keyes to Richard Dawkins in its stable. Even so, Schroder Salomon Smith Barney predicts that Penguin will also be reporting a significant slump in operating profits, as new releases from Tom Clancy and Madonna have been put on hold until the second half of the year.

So life hasn't been easy for Dame Marjorie, who is an icon of financial publishing and female executive power. Formerly a journalist and human rights campaigner, she really made her name when running The Economist magazine, where she boosted the publication's sales around the world.

She was a surprise choice to run Pearson, which was then a sprawling collection of disparate businesses, when she was plucked from The Economist in 1997. She sold off its stakes in investment bank Lazards and the waxwork exhibition Madame Tussaud's, slimmed Pearson down and brought a media and education focus to the group.

Towards the end of the 1990s she could do no wrong. The stock market was storming ahead and the Financial Times was being snapped up avidly by bankers in a booming Square Mile and private punters keen to make a million.

To add to the mix, the launch of FT.com and more than £100m of internet investment gave the company a dot-com kudos that pushed the shares above 2000p. Dame Marjorie's 1997 target of doubling the share price was achieved about three times over.

However, when the dot-com bubble burst, the City contracted and punters despaired over falling shares. Redundancies were rife, and the economic aftermath of the twin tower attacks in September 2001 pulverised the advertising market. "We do not believe the FT will ever reach its historic peak profitability of £81m in 2000," says Jeff Meys at investment bank UBS Warburg, who predicts it will make a £20m operating loss this year and the website a £10m operating loss.

Meanwhile, Pearson's share price has plummeted to 569p - below where it was when Dame Marjorie joined.

Forgiving investors might be able to put the share swing down to the whims of the stock market. But there are also concerns about the outlook for the businesses, and it is tomorrow's update on current trading that is most keenly awaited. Most of the educational and publishing revenues are skewed towards the second half, so the financial results are less important than the company's forecasts for the rest of the year.

A particular concern is the US schools arm, which makes up a fifth of its education revenues. Analysts doubt Pearson will hit its target to grow sales by 3 per cent this year, and predict they will be flat. "Although Pearson is likely to outperform the market, we believe growth in its schools business will be below its guidance," says Mr Meys at UBS. "If Pearson does reach the 3 per cent mark this year, this is likely to make comparisons harder in 2004, and for the two years overall we expect Pearson's schools business to be flat."

Some analysts also query the sustainability of growth at the group's US college division. Pearson has been raking it in from American freshmen in recent years, with the college textbook market increasing by an estimated 8 per cent per year.

However, the number of students at US colleges is expected to fall in the future, while increases in tuition fees mean the students are hard up. "With sharp rises in fees, the pressures on spend available for books can only increase," says Mr Meys. "We would argue that the choice between buying a used and new textbook is discretionary, and that budgetary pressures are likely to encourage students to buy used books."

For the entire Pearson group, UBS predicts that this year's sales will fall 4 per cent to £4bn while savage cuts in internet spending will boost profits by 8 per cent to £433m. Increased profits at Interactive Data Corporation, a financial information provider, and Recoletos, the Spanish newspaper and media group where Pearson has a 79 per cent stake, should also help to mask the problems at the Financial Times.

But despite these profit increases, analysts tend to prefer Reed Elsevier, a publishing company whose shares have performed better than the media sector as a whole over the past two years - while Pearson's have performed worse.

"Pearson is a bit of a curate's egg," says Anthony de Larrinaga, media analyst at SG Securities. "It doesn't draw much in the way of synergies ... it is difficult to see why owning the FT adds value to Penguin." But at the same time, a comparison with Reed indicates that Pearson has most of its eggs in the education basket. "Reed is more evenly diversified: science, medical, legal, business-to-business and education," adds Mr de Larrinaga.

Although Dame Marjorie is highly admired, her strategy is under question. While she has streamlined the business, she has also spent a lot of money on acquisitions. Pearson bought NCS, an educational testing company, for $2.5bn (£1.5n) in 2000, and that was widely seen as an expensive price. Dame Marjorie has also bought Simon & Schuster's educational publishing business for £3bn, the illustrated publisher Dorling Kindersley for £311m, and numerous small operations such as the Rough Guides series of books.

Although this has boosted sales, analysts moan that she is just lumping things together instead of trying to build growth in the individual businesses. "Has she added value or has she been busy building short-term earnings?" asks one. Another says: "The jury is out on Scardino until we see the fruit of her acquisitions."

This time last year, there was much speculation over how long Dame Marjorie would stay at the company, although investors do not seem to be breathing down her neck just yet. But the share price and the revenues will have to improve if she is to stay there until the next Democratic administration in the US.