Troubled Pearson's Stock May Be Headed for the Point of No Return

Pearson (PSO) is no stranger to change.

After all, the British multinational education and publishing company began as a construction business in the 1840s.

However, Pearson will have to undergo another dramatic shift if it is going to survive let alone thrive in the digital age.

On Wednesday, the company slashed its profit forecast, projected dismal sales prospects for its biggest division and cut its dividend.

With its stock down more than 28% already this year, Pearson is a relic of a bygone era, unsure of its way forward in a rapidly changing business landscape.

The traditional publishing industry has been hard hit by the rise of digital content, with the effects being felt by companies as varied as bookstore chain Barnes & Noble and newspaper giant New York Times.

In 2015, Pearson made some big changes,notably, selling off the iconic Financial Times and its 50% stake in The Economist, in an attempt to refocus its struggling business. That left the company dependent on its textbook and testing products division.

However, Pearson's education segment has been all but destroyed lately. Internet-based alternatives to physical textbooks and the popularity of online rentals led by Amazon, combined with a slowdown in college enrollment, have wreaked havoc.

Pearson's massive size is probably another impediment to its survival efforts. The company already tried to restructure as in, cut jobs last year, as well as back in 2013, but these moves have hardly been sufficient to offset the disruption to its core business model.

On Wednesday, these troubles led Pearson to project operating profit way below analysts' average estimates, which were already low. This marks Pearson's fifth profit warning in four years.

The company has already missed half-year estimates in six of its past eight financial reports.

Pearson also announced a plan to sell its stake in Penguin Random House. Proceeds from the sale are expected to help Pearson pay down its massive debt load, which stands at more than $3 billion.

However, unless Pearson can successfully re-position itself in the digital book industry, with a particular emphasis on ebook rentals, it could soon reach a point of no return. With its business in a state of flux and operating margins plummeting to decade lows, there is zero merit in getting into the stock at this time.

A dividend cut certainly doesn't add to the company's allure. For income investors, Pearson had carried a solid record, with 24 years of growing dividends.

With the company planning to re-base its dividend, the 6.6% yield is just a mirage.

Although stock may look attractive at less than 10 times forward earnings, for Pearson the worst is probably yet to come.

Investors looking for alternative plays on education and publishing may want to check out smaller firms Educational DevelopmentJohn Wiley & Sons and Scholastic. Although not without risk, these companies are still on safer ground.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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