After Pearson’s (LON:PSON) January trading update, shares in the publishing and education giant surged as much as 17 percent as investors latched onto the confirmation that the generous dividend will be maintained going into 2016.
However, the relief may be short-lived, The Telegraph’s Questor argued following the report.
The adviser said that Pearson has been forced to sell “the crown jewels” to address its growing debt levels, but noted that it is now increasingly exposed to any downturn in the US education market.
Dropping college enrolment numbers across the US and the loss of key testing contracts are expected to weigh down on the company’s performance.
“The balance sheet still looks to be in trouble,” Questor argued. “The operating profits are expected to fall to between £260m and £300m in the year ahead, and we think the company could be facing painful write downs in the value of its asset base. Time to sell.”
In contrast, Peter Stephens of The Motley Fool UK argued that shares remain “relatively cheap”.
“Clearly, Pearson faces highly challenging trading conditions, but its plan to cut costs seems to be both achievable and sound,” Stephens wrote last week. “While its shares are likely to remain volatile, Pearson seems like a very strong buy for the long term.”
Meanwhile, ratings agency Moody’s announced on Friday that it has placed Pearson on review for downgrade over concerns for the firm’s profitability expectations.
"Our decision to review Pearson's Baa1 ratings for downgrade reflects the prolonged weakness in its operating performance as a result of challenging conditions in several of its key education markets." says Gunjan Dixit, a Moody's Vice President and lead analyst for Pearson.
The review is expected to be completed in the near term and any downgrade of Pearson's ratings is not expected to be more than one notch, Moody’s said.
The Baa1 is the third-lowest long-term investment grade rating in Moody’s scale.
Fellow ratings agency Standard & Poor’s has Pearson on its lowest investment grade notch, BBB. S&P reduced its outlook on the publisher from “stable” to “negative” in October.
Pearson’s share price had dropped 1.19 percent to 748.50p as of 14:51 GMT today, broadly in line with the downbeat FTSE 100. So far in 2016, Pearson’s stock has appreciated about two percent, as compared with a six-percent drop for the FTSE. Over the past year, however, the publisher’s market valuation has nearly halved, while the FTSE has lost 15 percent.