Pearson and Imperial punished for similar failings

Negative surprises that look like they could have been avoided link Pearson’s and Imperial’s sharp stock price falls

The unusual sight of two FTSE 100 blue-chips falling by double-digit percentage amounts on the same day is coincidental. Guidance that wrong-footed both sets of investors is probably more important than their geographic link.

Pearson, the educational publisher, has troubles in the U.S. university market that go back more than half a decade. One major part is down to enrolments largely flatlining since 2010, according to Bloomberg data. Another is due to ‘substitution’: more and more educational materials are available for free. The ferocity of Thursday’s selling—the stock cratered by 19% at one point—also suggests resumed investor annoyance for the return of what looks like clumsy expectations management, at best. Pearson’s warning points to adjusted 2019 operating profit coming in at the lower end of a £590m-to-£640m guidance range. Yet it follows commentary in recent months giving the strong impression of recovery of Pearson’s U.S. courseware business.

Imperial Brands has faced similar criticism, though disquiet about how the tobacco company handled its own warning has been more vocal. U.S. regulators have been busy in recent weeks paving the way for likely sweeping new restrictions on vaping. The latest development was an FDA warning about a serious though unexplained lung illness among vapers. Consequently, shares of U.S. smoking product makers have decoupled from Wall Street’s rising trend this year. Altria, for instance, is down 18% in 2019. Imperial’s stock shows a similar flavour; now underperforming the FTSE 100 with a 21% fall against the benchmark’s 9% rise this year. Yet the maker of Gauloises, Rizla, Golden Virginia and Blu vaping devices was accused on Thursday, by an analyst at brokerage RBC, of ‘not making sense’. IMB stock dumped 12% at its worst after the group said earnings were unlikely to grow in its current financial year—which ends on 30^th September. Previously, income was forecast between 4% and 8%. Sales will now grow by 2%, against a previously given range of 1%-4%. Somehow, Imperial still expects its unprofitable smoking-alternative business to break even in 2020.

All told, takeaways from IMB/PSON troubles relate more to their specific industries than consumer markets overall. Imperial may be the latest smoking product firm to lose a grip on risks in the highly-regulated business, though is unlikely to be the last. Pearson’s challenges are more structural. A significant cycle of cost cuts has not righted a long-standing fault line in the segment from which it generates 25% of revenue. Both groups’ shares are set to remain under pressure into the year end.

Thoughts on Pearson Plc. chart

The consequences of PSON’s destroyed two-year rising trend line (confirmed by failure from below in late-July) continue to reverberate. Also note a decline connected by highs all the way back to April 2015. Together both lines created a giant wedge of reckoning. The stock duly broke to the downside of this in February and has been beneath it ever since. The farther tip of the falling trend now adds resistance. The shares have also crashed through supportive lows around 763p to 790p that began appearing last October. They should now pose resistance too. Eyes are now drawn to potential support at the definitively defended 651p and 565p lows from last February and September 2017.

Pearson CFD – Weekly [26/09/2019 14:19:58]

Source: City Index