FTSE edges higher ahead of Fed with Pearson leading the way

Pearson sold the FT to concentrate on education. Photograph: Peter Nicholls/Reuters

Publisher Pearson has come under pressure recently, after a warning on profits in October and a report that UK universities had stopped buying the company’s products in a row over ebook pricing.

But the company, which has restructured with the sale of various assets including the Financial Times, is heading the FTSE 100 risers, up 37.5p at 744.5p, following a couple of positive broker notes, one of which even suggests the company may be better off considering going private.

Exane BNP Paribas has upgraded from neutral to outperform, saying the risks of further earnings pressure in 2016 are real but the weak share price seems to have discounted the worst. It said it hoped new management would refocus the company and look at acquisitions and share buybacks.

Meanwhile Bernstein, after a conference call with Pearson chief executive John Fallon, issued an outperform rating and said it expected further restructuring charges in 2016, with IT and general and administrative costs likely to be cut. Analyst Claudio Aspesi said:

Longer term, Fallon described a company which is more focused geographically and in product/service range. He also underlined the need to keep focus in the near term on improving current performance, rather than pursuing new acquisitions.

We would like management to also consider more radical options, including a major downsizing of the business and tough decisions on capital allocation (including a possible buyback) and even taking Pearson private.Some of the options we would hope are on the table include focusing the company down substantially (possibly to just two or three countries – the US, the UK and perhaps one or two more with the most upside), and exiting businesses which – irrespective of performance – are unlikely to benefit for many years from the future adoption of technology.

Possible examples include the operation of physical schools, elementary and middle school courseware (the first seven/eight grades of formal schooling) and – possibly – testing and assessment..

A substantial shrinkage... would free up resources to progressively buyback stock as the total profits available to pay dividends would have to be cut; alternatively, management may consider whether Pearson would better off by taking the company private as it goes through a radical redesign.

Overall the FTSE 100 is up 27.11 points at 6044.89, as investors await the expected US rate rise from the Federal Reserve. But new figures from the UK showed why the Bank of England may not be in a hurry to follow the US example. UK earnings unexpectedly grew at their slowest pace since early 2015 in the three months to October, while the unemployment rate fell to 5.2% from 5.3%.

Elsewhere Dixons Carphone is up 11.6p at 488.3p following its figures, while SuperGroup has soared nearly 12% to £16.93 as its half year results beat expectations - the shares were hit earlier this week by a Liberum downgrade.

But other retailers have slipped back on concerns about the outlook for Christmas, with prices being slashed to encourage shoppers.

Supermarkets are lower on further consideration of Tuesday’s market share figures from Kantar Worldpanel, with Tesco down 2.95p at 146.35p and Sainsbury 3.1p lower at 246.2p. Morrisons is down 1.1p at 146p.

Womenswear retailer Bonmarche has slumped nearly 30% to 205.7p after it warned that profits would be lower than previously expected after challenging trading conditions since Black Friday in November, and it believed these would continue for the remainder of the winter season. At the same time it announced the departure of chief executive Beth Butterwick after four years. She will become chief executive of Karen Millen, and her departure would be “unhelpful to investor sentiment” for Bonmarche, according to analysts at Canaccord Genuity.

The cautious trading comments from Bonmarche have sent Marks & Spencer 5.5p lower to 457.1p and Next down 70p to £74.35.

Miners were also weaker again, with Anglo Amercan down another 0.85p at 270.25p as Deutsche Bank slashed its target price from £10.70 to 300p as part of a sector note.

Arm continued to slide, down 14p to £10.38 on concerns about falling demand for Apple’s iPhone which it supplies with its chip designs.

But Rolls-Royce has risen 13.5p to 553.5p after Warren East, Arm’s former boss who now runs the aero-engine specialist, announced it was scrapping a layer of senior management as part of its turnaround plan.