The US Federal Reserve keeps on putting off raising interest rates because inflation remains below its 2 per cent target. Try telling that to the average American student.
Tuition costs on this side of the pond are sky-high and rising fast, but the price of textbooks is in the stratosphere and on its current trajectory it is heading for deep space. According to official data, textbook inflation since 1977 is 1,041 per cent– almost four times the overall rate of inflation. The rise in tuition costs is not far behind.
So how come Pearson, the 171-year-old British educational publishing giant, is in such a funk? Betting (almost) everything on growth in the US education market looked a good idea 10 years ago, when Dame Marjorie Scardino was busy leading Pearson to multiple years of double-digit growth. Those days are long gone and Dame Marjorie’s successor as chief executive, John Fallon, has a Herculean task to turn things around.
Over the past couple of years Pearson has been able to offer the City almost nothing in the way of guidance beyond repeated profit warnings. In short, its guidance has been along the lines of, “we don’t know what will happen”. Uninspiring at best, a sure-fire “sell” signal at worst.
Pearson’s share price has halved since May and there is little for shareholders to cling on to other than the long-term hope that Mr Fallon can repeat some of Dame Marjorie’s magic and find a rich seam in a global education market that should still offer growth.
Pearson readily admits it has problems, but argues there are parts of the business that are performing as expected. A spokesman told The Independent: “Virtual schools, managed services in higher [education] and professional certification represent a quarter of revenue and are still showing good growth. Until recently, emerging markets were also growing at 8 per cent to 9 per cent annually.
“There is particular appetite for English language learning – for example, ‘Wall Street English’, taught to thousands of students. Yes, enrolment is down, but what we can say confidently is that there is a cyclical trend to growth in college enrolment; when it turns, we will be very well placed to benefit from that growth.”
Even so, understanding Pearson’s woes is impossible without some knowledge of the massive changes in education, and education inflation, in the US – where Pearson generates 60 per cent of group revenue.
For a start, there is a good reason why Pearson bet the house on American education in the first place: Scotland has a population of around 5.3 million, and 18 colleges and universities that can award degrees. In contrast, Kentucky, a state that ranks 47th in educational attainment, has a population of 4.4 million and 62 degree-awarding colleges and universities. All of those students, at least in theory, need books.
Pearson’s growth was fuelled by several key developments in US education: the rise of the “for profit” college system; the introduction of “common core” teaching methods; and the idea that students would ignore the cost of textbooks because the headline cost of higher education is tuition fees. All three of these pillars of the house of Pearson are under existential threat, and along with them the company’s status as the dominant education publisher.
For-profit colleges, of which there are thousands, have enjoyed stellar growth over the past 20 years but are now dropping like flies. Enrolment at the University of Phoenix, the largest among them, has halved. Another large for-profit group, Corinthian Colleges, filed for Chapter 11 bankruptcy earlier this year.
The criticism is that for-profit education companies encourage students to enrol (and take out large loans to do so) and can create unrealistic expectations about their earning potential post-graduation. Unfortunately, many employers look unfavourably on degrees from for-profit universities, and as a result many graduates are struggling to find work and repay loans. That many students are also military veterans makes this even worse, and the Department of Defense recently stopped the University of Phoenix recruiting prospective students on military bases.
The teaching of “common core”, a revised method of learning among junior and high school students, has also led to Pearson becoming engulfed in a political storm. Many Republicans (and some Democrats) oppose the method, which is designed to make students think rather than to learn parrot-fashion. Pearson has been the leading publisher of textbooks and tests that support the common core, its unpopularity tainting the company by association and resulting in lower than forecast revenue.
More and more students are also taking issue with the price of textbooks. A four-year undergraduate degree in the US might require $300 (£200) worth of books per course. That adds up, and buying at full retail cost might easily add more than $10,000 to the cost of an already expensive degree. Postgraduate degrees, where tuition costs are much higher, can require just as many books. Increasingly, students have cottoned on and are buying used books or older editions and searching online for electronic rentals. Renting an electronic version of a book can cut the cost significantly – and the profits made by companies like Pearson too.
While the current state of flux in the American education market is having a big impact on Pearson’s business and its ability to give City analysts confident guidance, markets outside the US are adding to the company’s woes.
Pearson also sought to grow its business via the digitalisation of education courses in emerging markets. However, global economic turmoil has discouraged potential students in many countries and more are turning to employment rather than pursuing further education. That may change as the economic cycle turns in Pearson’s favour, but when that turn starts is anyone’s guess.
Pearson recently got rid of arguably its two most blue-chip assets – its stake in The Economist magazine and the Financial Times. Those sales raised a combined $1.4bn – a tidy sum for what were arguably overvalued trophy assets to begin with. Even so, it is now left with the task of investing that capital or returning it to shareholders – and dumping the crown jewels when nothing else seems to be going right could end up being something the company lives to regret.
Wall Street and the City appear to be unanimous in their assessment of Pearson right now: while the stock appears to be cheap, there is little hope of any short-term improvement in its fortunes, so it is likely to stay cheap.
The investment bank Morgan Stanley is one of the most positive on Pearson, but even its analysts are struggling to say anything particularly upbeat: “Pearson clearly faces a series of unfavourable market conditions – in US colleges, in US testing , in the UK testing business and emerging markets – which will last at least through 2016 and into 2017.” Downbeat, indeed.
With only one trophy asset left on the books, Penguin Random House, Pearson has few options at its disposal. Maybe those students can be good for a few extra bucks.
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