Does Pearson Need to Sell the Financial Times?

Pearson plc (PSO) is known for its Financial Times newspaper and Penguin book unit, and is one of the world's biggest publishers. But as you can see from its revenue distribution chart below, Pearson is dominated by its education units, which consist of North American, international and professional education divisions. These education segments account for around two third of Pearson’s total revenue.

The following table shows that during the first 6 months of 2009, Pearson‘s revenue shot up 22% over the year-ago period. Much of the growth came from international expansion of its education publishing, as well as the FT online group.

Segment	YOY Sales Change	Operating Margin
North American Education	32%	1%
International Education	22%	5%
Professional Education	26%	11%
Financial Times Publishing	-6%	8%
FT Interactive Data	34%	30%
Penguin	11%	5%
Total	22%	7%

Education - High Growth, Low Margin

Pearson is heavily dependent on textbook spending, which is actually proving resilient to the global recession. In North America, its school-curriculum business gained market share, but faced tough conditions as a result of the weakness in state budgets.

Suzanne Stein, Morgan Stanley Education Stock Analyst, sees 12% to 15% growth over the next 12 months for education industry. However, Pearson’s margins are thin in North American and International education divisions.

The trend for digital textbooks might improve its margins, though the overall effect is still unknown. For example, CourseSmart LLC, a joint venture of six publishers, including Pearson, is going to offer more than 7,000 e-textbooks through Apple Inc.'s (AAPL) iPhone and iPod Touch. Digital textbooks are offered by CourseSmart for about half what it costs to buy the physical books.

FT Publishing – Online is The Future

While Pearson's education and book-publishing businesses have been fairly stable in recent years, results at FT Publishing have been more volatile.

Its Financial Times unit was hit by a big drop in ad revenue. The number of online subscribers paying for the FT rose 18% to 117,000, while worldwide circulation of the newspaper dropped 6% to 421,429.

According to The New York Times, the 16.6% drop in combined print and digital ad revenue last year was the worst since the Depression. The freefall in newspaper advertising may be slowing, but newspapers will be the last media to get any ad comeback. The loss of classified ads to web sites like Craigslist.org is most likely permanent.

Between the first half of 2004 and the first half of 2009, online newspapers' unique audience has almost doubled from a monthly average of 41,147,206 to 71,831,867 in U.S., according to Nielsen Online. The following chart from www.mediapost.com shows monthly traffic:

Competitors

Name	Symbol	P/E	Debt/CF
Pearson Plc	PSO	16.4	3.4
McGraw Hill Cos.	MHP	11.3	0.9
John Wiley Sons CL A	JW.A	16.6	2.4
Scholastic Corporation	SCHL	N/A	1.9
Thomson Reuters	TRI	18.5	2.8
News Corp	NWS	N/A	N/A

Pearson is the biggest company (in terms of market cap) in books publishing industry. But compare to other players such as MHP, JW.A or even SCHL, it has the highest debt to operation cash flow ratio (3.4).

Conclusion

Over the past decade, Pearson’s strategy has been to transform from publishing company to content, technology and services company. This strategy seems to be paying off. It became less reliant on faltering advertising revenue, which accounts for just 3% of total revenue now.

The FT Interactive Data division’s revenue grew 34% over the last year, and operation margin was the highest (30%) among 6 divisions.

However, if Pearson ever needs to sell assets and reduce debt level, or to concentrate on its core business (education), Financial Times might be a crown jewel lots of companies want. Given its reputation, it might get the same premium News Corp paid for The Wall Street Journal or Thomson paid for Reuters.

With P/E of 16 and lots of unknown, Pearson might not be inexpensive. No wonder it is getting harder and harder to find relatively inexpensive growth stocks these days.

Disclose: I have no position on PSO. PSO is my company’s client. All data is from public available sources.