In a twist of corporate evolution, Pearson (LSE:PSON) is transforming itself from a dull textbook publisher into a “digital-first company” for “life-long education”.

CEO Andy Bird, previously an executive at Disney, told the Financial Times this week that Pearson has become a “growth stock” since he took the reins two years ago.

And it appears people are taking notice. The proportion of the total float held by US shareholders has doubled since Bird took over, from 10% to 20%. Meanwhile, CEO of the ARK Invest ETF Cathie Wood – known for buying Silicon Valley growth stocks like Tesla, Zoom, and Roku – bought 23,300 shares in Pearson in Q4 2021.

Unlike many of Wood’s holdings, Pearson is already profitable. Another difference comes in the stock price movement: it has gone up 50% in the year to date. As a textbook published by Pearson might say, compare and contrast that with ARK Invest’s 60% price crash this year!

Hire education

In a move to digitalise its offerings, the company now sells e-textbooks through a subscription service called Pearson+. For $14.99 a month, students can access 1,500 titles on up to two devices.

It has also recently made bold moves to establish itself in the workforce training market. The company acquired Credly this year, a service for “recognising achievements” by “issuing and managing digital credentials”. In addition, Pearson bought out Faethm, a data and analytics solution that promises to help employers and policymakers “navigate the Fourth Industrial Revolution and the Evolution of Work”.

Andy Bird told the FT: “There used to be higher education. There’s now hire education.”

The sales pitch is an enticing one. Bird said the company could revolutionise adult learning through technology-enabled training pathways. At the same time, Pearson can count on the “real sales and real profits and real cash flows” of its already established arms, according to Bird.

Oldest trick in the textbook…

Of course, Pearson is keen to focus investors’ attention on the workforce skills division of its company. According to its interim results, this segment grew by 6%. But bear in mind the workforce skills division only makes up 7% of Pearson’s sales currently.

Meanwhile, the far chunkier higher education unit – accounting for 21% of sales – softened by 4%.

Is the talk about breaking into the workforce training market all just smoke and mirrors?

One analyst, who chose not to be named, told the FT this week: “In workforce solutions they are so far behind — they don’t really have anything.”

In addition, Pearson faces stiff competition from the likes of 2U and Coursera.

To its credit, unlike most growth stocks, it does pay a dividend (with a forward yield of 2.5%). In addition, it looks very reasonably priced even after shooting up 50% this year, with a price-to-earnings-growth (PEG) ratio of 0.61.  

However, I’m left cold by grandiose terms like “the Fourth Industrial Revolution” and the “Evolution of Work“. And these seem to be the ideas that form the basis of Pearson’s growth story.

Given that I’m unmoved by the growth narrative, and it’s too expensive to be a value stock, I can’t give Pearson a passing grade so won’t buy.

Diageo

Thanks to its bumper portfolio of 200+ brands that people continue buying whatever the economic climate, Diageo (LSE: DGE) is one of my favourite FTSE 100 stocks.

But another one of Diageo’s attributes is that it’s a truly global business. It’s this geographical diversification that should mean the company is able to remain resilient in the face of a plunging pound.

Trouble is, Diageo shares never trade at bargain basement prices. Right now, for example, they change hands on a price-to-earnings (P/E) ratio of 22. That said, this is actually below the five-year average valuation of 25.

The company is also a reliable source of dividends. Sure, a 2.2% yield might look very average compared to some in the FTSE 100. However, Diageo has been remarkably consistent in hiking its payouts every year.

Personally, I’d rather have a smaller but more stable level of passive income than one reliant on firms that may never pay up. If I had the cash, I’d jump in.

National Grid

What it does may be essential, but National Grid (LSE: NG) shares have been losing height over recent months. As I type, the stock is down 12% this year.

I wonder if some investors may begin reaching for the ‘buy’ button again. After all, a good proportion of the power provider’s assets are actually located across the pond. It owns and operates electricity distribution networks in upstate New York and Massachusetts and gas distribution networks across the Northeastern US.

All this dollar exposure should mean that this highly defensive company can maintain its status as a dividend aristocrat going forward.

Holders are now looking at a yield of 5.7%. That’s pretty attractive to me considering that the best savings account only offers 2.5%. A P/E of 14 is also lower than it was earlier in the year.

If my own portfolio weren’t more tilted towards growth stocks, I’d hoover up some of these shares.

Pearson

Pearson (LSE: PSON) is yet another top-tier member worth commenting on. It provides tests and scoring services to governments, educational establishments and businesses with a particularly large presence in the US.

Of the three FTSE 100 stocks mentioned here, Pearson has been easily the best performer in 2022. The shares are up 44% as I type. Is there more to come?

Again, the fact that it has significant operations in a dollar-denominated market (where earnings are then converted into pounds) probably won’t do any harm. The growth in digital learning, turbocharged by the pandemic, looks set to continue as well.

However, I shouldn’t overlook the possibility that recent share price gains are due to a failed takeover deal earlier in the year. The company may potentially still be a target but the question is, how much hope of another bid is now priced in?

I’d say a fair bit. Pearson’s shares trade at 18 times forecast earnings. The five-year average is 13 times.

I believe there are better opportunities out there for my portfolio.

Why did Pearson shares rally?

Pearson is best known as an international publishing house, but it actually makes most of its money as the world’s largest educational provider, through e-learning and training materials.

So what’s been happening with Pearson shares recently? Well, as I write, the shares are trading for 769p. At this time last year, the shares were trading for 838p, which is an 8% fall over a 12-month period. The shares were on a downward trajectory and fell to 606p when the stock market correction occurred in March. The shares have rallied 25% since that point to current levels.

I believe the Pearson share price rallied due to a rejected takeover bid worth £7bn from private equity firm Apollo Global Management. Two further offers from Apollo were also rejected as management at Pearson thought both offers undervalued the business. This has led to increased confidence in the stock and has helped drive the price up in recent months, in my opinion.

Risks of investing

I must be wary of solely looking to add a stock to my holdings because the shares are rallying on the back of a failed takeover bid and management’s confidence of future growth. That would be a risky strategy. Furthermore, the educational market is saturated and competitive, with many players jostling for market share.

Another issue I must note is the current cost-of-living crisis, which could affect Pearson’s performance. Consumers may look to cheaper, more accessible alternatives rather than established providers like Pearson. This could hurt financials and investor returns.

The bull case and my verdict

One of the positives I note with Pearson is its current market position, profile and presence. It has an extensive reach and it can leverage this position to boost performance, financials and potentially investor returns in the long term.

Next, I like the fact Pearson is moving with the times and looking to move its products and services online. From an investment perspective, this is a shrewd move as it will only increase its cash generation and profitability. Increased profitability could result in increased investor returns.

Looking at Pearson’s past performance, I saw that 2020 was a difficult year due to the pandemic. Performance bounced back in the year ending 2021, to grow revenue and profit and decrease debt levels. I do understand that past performance is not a guarantee of the future, however.

Finally, Pearson shares pay a dividend that would boost my passive income stream. Its current dividend yield stands at just less than 3%. I am aware that dividends can be cancelled at any time, however.

I think Pearson shares still have some room to grow and I would add the shares to my holdings. The share price increasing in the past three months isn’t the reason I would buy the shares, however. Pearson’s performance record, dividends, market position, and growth prospects drive my decision here.

The surging momentum behind Pearson shares

I’ve explored this business before. But as a reminder, Pearson is a leading provider of educational material and learning services. Its books and other digital content can be found in most schools as well as universities scattered across the UK and North America.

Usually, when a share price experiences a sudden uptick, it’s often thanks to an encouraging earnings report. But while Pearson did recently release its 2021 full-year results, that’s not the reason why the FTSE 100 stock is on the rise. So, what happened?

The spike was actually caused by the rejection of a £7bn takeover bid from Apollo Global Management. The private equity firm has had its sights locked onto Pearson since November last year. And after a failed takeover bid then, it tried again with an increased offer of 854.2p per share. But this latest attempt met the same fate as Pearson management said “it significantly undervalued the company and its future prospects”.

This seems to have sparked renewed shareholder confidence in the FTSE 100 stock’s long-term perspective leading to this week’s jump. Either that or investors are expecting another higher takeover bid.

What’s next for the FTSE 100 stock?

Apollo has been on the prowl for several FTSE stocks lately. In 2021, it was locked in a bidding war for Morrisons that it ultimately lost. But given it’s now pursuing Pearson, I think it’s fair to say the private equity group is still searching for bargains in the UK stock market.

Now that its latest offer has been rejected, is this the end of the road? Maybe not. Under British takeover law, Apollo has until 8 April to make another bid. Otherwise, it has to withdraw its interest and walk away for six months before being able to try again.

Of course, another private equity group could step into the arena and try its luck with a new bid. And I wouldn’t be surprised if this possibility was a contributing factor to this week’s jump in the FTSE 100 stock. But if that’s the case, then the Pearson share price is currently being bolstered by speculation rather than fundamentals. And in my experience, this could lead to some significant volatility, especially as Apollo’s deadline gets nearer.

Should I buy now?

Pearson’s management clearly believes it has a bright future ahead. But how long it will take to realise that future remains to be seen. In the short term, it looks like the FTSE 100 stock is being driven by expectations of another takeover bid. And in my opinion, investing in a company with the hopes of an acquisition isn’t a prudent strategy. Therefore, I’ll be staying on the sidelines for this one.

A late morning announcement told us that “Apollo Global Management, Inc. and its subsidiaries (Apollo), on behalf of certain of its affiliated funds, notes the recent market speculation in relation to Pearson and confirms that Apollo is in the preliminary stages of evaluating a possible cash offer by certain of Apollo’s affiliated funds for Pearson.”

The share price had been in a bit of a slump. A nine-month trading update in October disappointed the market, and led to a rapid sell-off. But prior to that, the stock had been in a decline following years of falling revenues. Even a brief spike following full-year results in February quickly reversed. Over the past 12 months, Pearson stock is down 21%, even after Friday morning’s jump.

For the year to December 2021, Pearson reported a 33% rise in adjusted underlying operating profit. The adjusted and underlying nature of that does add risk of uncertainty. But I found it encouraging.

Pearson share price valuation

On adjusted full-year earnings, the current Pearson share price (after Friday’s hike) suggests a trailing P/E of 22. On the face of it, that doesn’t look like a screaming bargain to me. The full-year dividend yield came in at 2.6%. Again, that’s perhaps not immediately attractive. But if growth is back on the cards, I reckon it could be the start of a healthy long-term income stream.

Tellingly, the company also announced a £350m buyback programme to commence in 2022. That suggests Pearson sees its own shares as undervalued. And the fact that it has capital to return in this manner indicates confidence in its long-term outlook.

That buyback hasn’t started yet. And with Apollo confirming there’s a possible cash offer on the cards, it might never happen now. But the talk of an offer does indicate one thing — there are others who see the Pearson share price as too low. 

Waiting time

While Apollo’s announcement gave the Pearson share price a boost, it contained no hint of a possible offer price. The release told us: “There can be no certainty that any offer will be made, nor as to the terms on which any such offer might be made.” And that’s pretty standard when a possible takeover is in the making.

About the only thing we can be sure of is that the clock has started on any offer timescale. According to the takeover code, Apollo now has until 8 April to to announce a firm intention to make an offer, or to tell us there’s not going to be one.

Either way, we’ll know within the next 28 days.

I am looking for corporations benefiting from significant structural tailwinds. These should help them continue to report growth, no matter what the future holds for the global geopolitical environment. 

With that in mind, here are my favourite cheap UK shares. I would buy both of these stocks for my portfolio today. 

Educational market growth

The first company is education group Pearson (LSE: PSON). The enterprise focuses on providing learning materials for institutions around the world. This is a market that is only likely to grow in the decades ahead.

According to its latest results release, underlying sales grew 8% overall in 2021, primarily driven by an increase in demand for professional qualifications.

Management has also been pushing to move much of the business online, which has helped improve overall profitability and cash generation. Indeed, as a side effect of this, at the end of the year, the company had managed to reduce its net debt by around £113m to £350m. 

However, Pearson’s business is not without challenges. This market is competitive, and the rising cost of living could push consumers to look elsewhere for cheaper educational materials. This is probably the most considerable risk to the company’s growth right now. 

Still, with the stock trading at a forward price-to-earnings (P/E) multiple of 14.7, below its five-year average of around 17, I think the shares look undervalued, compared to the group’s potential. 

One of the best cheap UK shares

As well as Pearson, I also believe Currys (LSE: CURY) is another business that looks undervalued compared to its potential. 

After a couple of years of volatility, the group now appears to be getting itself back on track. Sales for the 10 weeks to 8 January increased 11%, compared to the same period in 2019. That is a notable improvement. It also shows that the demand for tech remains robust, despite the global supply chain crisis and high demand reported in 2020. 

And we have to be aware of such challenges over the next 12-24 months. The supply chain crisis could hit the availability of products, while consumers may put off purchases if prices rise too much. 

Even after taking these into account, I think the demand for electronics and electronic equipment will only grow in the years ahead. This is the primary reason I would buy the stock for my portfolio today.

It is also selling at a 2023 P/E ratio of just 6.4, which looks incredibly cheap, considering the company’s position in the UK and European electronics market. A potential dividend yield of 3.8% only sweetens the appeal for me. 

Publishing and educational materials

Often best known as an international publishing house, Pearson actually makes most of its money from the educational arm of the business through its e-learning and educational materials. It has a presence in over 200 countries and is supported by approximately 20,000 employees. 

As I write, Pearson shares are trading for 616p. At this time last year, the shares were trading for 723p, which is a 14% drop over a 12-month period.

For and against investing

FOR: Pearson’s recent performance tells me that a pandemic-related hangover could be a thing of the past and things have turned a corner. In addition to this, there could be some growth opportunities in the future. Pearson reported in a post close update that sales were up by 8% and demand was high. It expects to report a profit of £385m, up 33% from last year.

AGAINST: I believe Pearson’s biggest threat is competition. Many smaller firms have been attempting to gain market share and prize this away from the FTSE 100 incumbent. Pearson is dominant right now, but a serious competitor emerging with a new product or solution for educational materials could hinder any growth and returns.

FOR: Pearson is in a great position in its marketplace, despite other firms attempts to chip away at its dominance and market share. Its brands are highly respected throughout the world and known for their quality. I believe it can leverage its position to dominate the market in the coming years. As the pandemic eases and economic recovery continues, and as the world continues to digitise, Pearson could grow and provide some lucrative returns.

AGAINST: At the height of the pandemic, Pearson’s growth was an issue as educational enrolment slowed. There is a risk that even though the pandemic may ease, there could be less demand for higher education services, and less demand for its products in the years ahead. These days youngsters have many more options than going straight into higher education after leaving school. This could hurt demand for Pearson.

A FTSE 100 stock I’d buy

Due to macroeconomic factors in recent months, there has been a stock market correction. This has actually thrown up some bargains and I have changed my position on stocks I previously would not have considered for my holdings. Pearson is one of them after its recent results and outlook ahead as well as some other fundamentals. 

At current levels, I think Pearson could be a good stock for my holdings and I would buy the shares. As well as its excellent market leading position, recent results point towards high demand and growth for the future. The shares also currently look cheap with a price-to-earnings ratio of just 16. Finally, as a bonus, Pearson sports a dividend yield of 3%, which would make me a passive income too. It is worth noting the FTSE 100 dividend yield average is 3%-4%.

Here are two companies that I would acquire for my portfolio with an investment of £2,000 today. 

FTSE 100 shares

The first outfit on my list is the homebuilder Taylor Wimpey (LSE: TW).

Shares in this company have faced selling pressure recently for several reasons. Investors have been dumping exposure to the homebuilding sector in general as it is facing growing liabilities from the cladding scandal. The government is trying to force developers to pay to remove dangerous cladding from buildings, which could become a multi-billion pound liability.

At the same time, rising costs are threatening Taylor’s profit margins. 

While I cannot overlook these risks, I think they are only short-term headwinds. The UK housing market is structurally undersupplied, suggesting the demand for new homes will remain elevated. Taylor is one of a handful of big developers that has the size and scale to produce properties in the quantities the country requires. 

As such, I believe this FTSE 100 company has a bright outlook in the long run. With these tailwinds behind the business, I would be happy to add the stock to my portfolio today as a long-term income and growth investment. At the time of writing, the shares also yield 3%. 

Shares to buy for growth

Another FTSE 100 company that I believe is also benefiting from structural tailwinds is Pearson (LSE: PSON). 

The education and training materials corporation is seeing a boom in demand for its products. The combination of the economic recovery and the rapidly digitising economy has provided a dual tailwind for the firm’s services.

According to its latest trading update, total group sales jumped 8% as virtual learning and qualification sales expanded at a double-digit rate. 

Once again, I do not think these trends will come to an end any time soon. There will always be a need for training and education, especially as the world’s economy grows and develops. Major training and qualification providers such as Pearson also have a competitive edge because their brands are highly respected in the market. 

That said, Pearson has faced pressure from smaller companies edging in on its turf in recent years. That is something I will be taking into account as we advance. These challenges are probably the most significant headwind to the group’s growth. It does not seem as if they will vanish any time soon. 

Despite this risk, I am highly impressed by the FTSE 100 company’s recovery. I think there will be further growth from the business over the next year as the economy continues to reopen and more employees return to the workforce. In addition to these factors, the stock also yields 3%. 

Publishing and education

Pearson is best known as a publishing house; however, the business comprises three main divisions. These are education, Financial Times, and Penguin. In fact, two-thirds of its revenue is derived from its education arm. With a presence in over 200 countries and approximately 20,000 employees, Pearson is a global firm with a vast reach.

As I write, shares in Pearson are trading for 631p, which is 25% less than in May when shares were trading for 843p. A year ago, shares were trading for 655p, which is a drop of 3% compared to current levels.

I believe the Pearson share price has dropped off, especially recently, due to a mixed trading update and a pandemic-related hangover. This update also revealed growth is slowing for the company, which may have spooked investors, driving down the share price.

Trading update and looking ahead

Pearson’s trading update, released on 15 October, resulted in a 15% share price drop the same day. The update covered the nine months ending 30 September 2021. Some positives were that revenue for the period increased by 10% compared to the same period last year. This was primarily driven by its virtual learning and assessment divisions. In addition to this, Pearson recently launched its own app, called Pearson+. The app allows US students to access its educational content for $14.99 a month and there are already over 2m sign-ups.

The other side of the coin for Pearson that emerged from this update was the fact that growth is actually slowing down. Higher education sales declined by 7%. This is most likely in part due to the US’s decline in enrolment figures. Lower student numbers means fewer customers to sell to. Furthermore, the Pearson+ app may have over 2m sign-ups, but only 100K are paying the subscription fee mentioned. The remainder are signed up via bundles and offers with other services.

Better FTSE 100 opportunities

I understand that the pandemic has affected student numbers and new applications for places. With reopening in full effect, there is the chance things could return to normal sooner rather than later. In fact, Pearson has decided to maintain its guidance for full-year results, which tells me it believes the same.

Overall, I would not buy shares in Pearson right now despite the cheaper share price. I’m put off by the current market challenges linked to the pandemic and falling student numbers, as well as the shift to its application, which is a new product with little history to reflect on. In addition, its historic track record shows me revenue has been declining year on year for a few years now. I understand that past performance is not a guarantee of the future but I use it as a gauge when reviewing investment viability.

I will keep an eye on developments and perhaps full-year results may lead me to reconsider my position. For now, I believe other FTSE 100 opportunities are better placed to boost my portfolio.

The progress continues

I’ve explored this company before. But as a quick reminder, Pearson is a leading provider of educational content and digital learning services used in schools and universities. Last Friday, it released its nine-month trading update. And despite what the Pearson share price would indicate, there was some encouraging news. Revenues for the period were up by 10%, driven primarily by its Virtual Learning and Assessment divisions.

Furthermore, its recently launched Pearson+ learning app seems to be taking off. This subscription service allows US students to access all of Pearson’s educational content for $14.99 per month. And as of the end of September, over two million people had signed up.

This is obviously good news. So why did the stock plummet?

The falling Pearson share price

Seeing growth in the top line is encouraging, especially since revenue between 2016 and 2020 has actually fallen steadily by around 25%. However, what’s less exciting is that the growth rate is, in fact, slowing down, which seems to have spooked investors.

The firm’s Higher Education division saw its sales decline by 7% over the last nine months. After conducting an internal investigation, Pearson has discovered that the US is currently suffering from an enrolment decline at community colleges. The factors behind this are undoubtedly numerous. But it could most likely be attributable to both the pandemic and a strengthening labour market. Regardless, the end result is that there are fewer students for Pearson to sell to this year.

What’s more, the rise of Pearson+’s popularity may not be as lucrative as it seems. Of the two million subscribed users, only 100k are actually paying for a monthly subscription. The rest have signed up through bundles and other special offers included in existing subscription services.

The bottom line

While slowing growth is never a pleasant sight, I feel investors may have overreacted. The catalyst behind the decline stems from a seemingly temporary issue within university enrolments. This is obviously out of the company’s control. But as the pandemic slowly comes to an end, education institutions can return to more traditional teaching methods. This may result in higher education becoming more appealing again.

That’s what I think, at least. And it seems management agrees. Why? Because despite this slowdown, guidance remains unchanged. This means the company seems to be on track to deliver operating profits in line with market expectations by the end of the year.

So, is the fall in the Pearson share price a buying opportunity? Maybe. But it’s not one I’m interested in taking advantage of just yet. Pearson+ seems to be the next primary growth channel for this business. However, given its relatively short operating history, it’s hard to judge just how successful it actually is. Therefore, I’ll be keeping this stock on my watchlist for now.