Why Pearson shares crashed to 2009 low

When Pearson issues a profits warning, they tend to be pretty savage. A big red light 15 months ago, shortly after it agreed to sell the FT to Japan's Nikkei, caused the share price to almost halve in less than three months.

Now, a collapse in demand at its North American higher education courseware business means profits at the education giant will plunge. That's why it's flogging the Penguin books business and cutting the dividend in 2017.

There was some good news in Wednesday's trading update, but it took just one short paragraph to tell shareholders that operating profit in 2016 would meet forecasts. A restructuring programme has gone a little better than expected, too.

Elsewhere, however, Pearson suffered an "unprecedented" decline at the North American higher education courseware business during the fourth quarter - net revenue fell 30%.

It suffered an 18% slump over the 12 months - 2% down to lower enrolment, 3-4% due to a shift toward rental products, and around 12% blamed on an "inventory correction in the channel reflecting the cumulative impact of these factors in prior years". That's overstocking.

By late morning, Pearson was trading down 30% at 562p, its lowest since July 2009Pearson now begins 2017 with underlying profit around £180 million lower than expected in early 2016, and it warns ongoing pressures in the US will likely persist this year.

It'll make an operating profit of between £570 million and £630 million this year, according to current guesstimates, giving adjusted earnings per share (EPS) of 48.5-55.5p. Gareth Davies, an analyst at Numis Securities, had pencilled in £747 million and 69p of EPS.

A rush to sell had the share price in freefall first thing. By late morning, they were trading down 30% at 562p, their lowest since July 2009.

"The bottom of our guidance range assumes that inventory levels continue to fall resulting in a 7% net revenue decline," said Pearson Wednesday. "The rest of business is expected to perform broadly in line with trends seen in 2016."

Fixing this will not be easy. An extra £50 million is being pumped into the digital business and new products and it'll slash prices to win share in the eBook rental market.

Significantly, Pearson is also selling its 47% stake in Penguin Random House, the joint venture set up in 2013 when its book-publishing business was merged with that of Germany's Bertelsmann. Some of the cash received will be handed back to shareholders.

Exercising an option to exit the publishing business was something Pearson boss John Fallon predicted in 2015 would probably happen this year, so is hardly a surprise. Bertelsmann is reportedly happy to increase its stake, at the right price.

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