Pearson chief executive John Fallon received a gold star from shareholders for Friday’s first-half results. Shares in the education group made their biggest one-day move for more than a year. Underlying sales increased 2 per cent. Profits rose 30 per cent, helped by near completion of a cost-cutting programme. Pearson’s time in the remedial class is coming to an end.
The group has a history of slip-ups. On the face of it, its timing may be improving. Traditionally, education is counter cyclical. The US has enjoyed its longest economic upswing in history. In good times, getting an education is less attractive. US college enrolments this spring were down 1.7 per cent, the eighth consecutive year of decline. Technology has also meant that students have bought fewer textbooks.
Mr Fallon deserves recognition for surviving the economic expansion intact. Numerous profit warnings, and a share price a quarter below its level when he became boss would have unseated a less tenacious person. But the looming US slowdown does not present the opportunity for Pearson and “Teflon John” it might once have.
If enrolments decline when jobs are plentiful, students of economics would argue that the opposite is also true. In 2009, just after the global financial crisis, the US higher education publishing market grew by 12 per cent. Pearson’s education businesses — an analogue for the group as it is now (meanwhile, it shed assets such as the Financial Times) — increased revenues by 4 per cent that year, and 5 per cent in 2010.
But structural factors are driving US college enrolment lower. The soaring cost of education is one. College tuition fees have steadily outpaced inflation over the past decade. Student debts have more than doubled to $1.6tn. That has weakened the economic case for studying. Net returns on an education over a 20-year period are now 3 per cent a year or less for 500 of the 1,900 US colleges tracked by Payscale.com.
Cost cutting and limited growth will continue to help. However, Pearson’s defensive credentials have been diminished by the changes in US education. The group is recovering. The rebound will not be magna cum laude.
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