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Pearson's underlying revenue expanded by 4% in the first half, in line with its mid-single-digit growth guidance. Management also confirmed operating profit guidance of GBP 640 million to GBP 685 million.

Why it matters: Pearson's strong performance was in areas with solid runways for growth, with virtual learning and enterprise learning segments expanding underlying revenue by 19% and 7%, respectively, a positive sign that it's executing on 2026 innovation strategies. Its largest segment, assessment and qualifications, held performance back, with underlying revenue falling by 2%. Management anticipates the segment will return to growth in the second quarter. Pearson continues to integrate artificial intelligence into its products, including lessons to upskill workers. While this is by no means a guaranteed plan for success and will require successful execution, we think these updates are necessary to keep pace in the education industry.

The bottom line: We are raising our fair value estimate to GBX 1,050 and $14.00 from GBX 1,000 and $13.30, after adjusting our margins to account for midyear results. Shares are slightly undervalued. We are in line with guidance for revenue and operating profit, after removing the currency impact. Pearson expects early careers and enterprise upskilling/reskilling, both of which focus on helping individuals develop job-ready skills, to drive growth. Business leaders are increasingly investing in their employees to help them develop new skills.

We are raising our fair value estimate to $14.00 per share from $13.30 per share to account for strong 2026 margin performance, corresponding to a forward enterprise value/EBITDA multiple of 7.1 times and a 2026 EBITDA of GBP 1.1 billion.

We anticipate 4.6% revenue growth over our forecast period, with organic growth of 4.7% offset by currency headwinds. Growth in reskilling and upskilling—the process of gaining new skills to either improve in your current role or transition to a new one—is a key tailwind driving growth over our forecast period. As such, Pearson’s virtual learning segment has the highest forecast growth rate, at 9.5%. We also raised our enterprise learning and skills forecast, as it benefits from industry tailwinds.

We model a 90-basis-point margin increase in our forecast, driven by synergies as it continues to move toward digital. We are slightly below guidance for the medium-term margin impact, as we find a 40-basis-point annual increase to be too high. We are skeptical of growth for its highest-margin business—assessment and qualifications—a driver of our difference.

We assign Pearson a no moat rating. Pearson possesses many attributes of intangible assets and switching-cost moats in both its assessment and qualifications business and its higher education business, but neither business is strong enough to translate into sufficient organic growth or pricing power to earn above its cost of capital.

Pearson’s core businesses, assessment and qualification, and higher education, account for 60% and 20% of operating profit, respectively. The assessment and qualifications business administers scaled in-person and online testing services for test creators, including in-house tests and for organizations such as the National Council of State Boards of Nursing. The higher education segment provides learning materials for the postsecondary market, such as e-textbooks and other study resources.

Pearson holds one of the top positions globally in both of these segments. In assessment and qualification, Pearson is significantly larger than online testing firms such as ProctorU and Wheebox, both of which generate annual revenue of under $100 million. Similarly, their largest in-person testing US peer, PSI Services, generates under $500 million in yearly revenue and conducts 28 million tests annually, compared with Pearson, which delivers an estimated 35 million tests annually across all its products. While Pearson does not provide a breakdown of digital versus in-person testing, the segment earned £1.6 billion in 2024. In higher education, the three top players—Pearson, McGraw Hill, and Houghton Mifflin Harcourt—control 85% of the textbook market, with Pearson holding a slight lead.

The assessment and qualifications segment possesses many moaty qualities, including a portfolio of owned tests built on its expertise and switching costs associated with its global scale. However, neither advantage has led to organic growth, which has harmed its return on invested capital and prevented us from awarding the segment a moat. Pearson's largest assessment business, Pearson VUE, runs in-person and online tests on behalf of the test owners. They do not own intellectual property in these cases, as they only administer tests on behalf of others. However, Pearson benefits from its IP in two of its four other segments, clinical assessment and UK and international qualifications, which allow it to achieve higher margins of 23% compared with 15% for the whole group, as the expertise required to develop these tests enables it to charge higher prices. However, Pearson’s superior products have not resulted in sufficient revenue growth to cover its investments.

Pearson also has some switching costs in assessments and qualifications, but it fails to build a moat. Pearson is the lone true global test administrator and has the most locations across the United States. For national and international businesses, no peer matches Pearson's scale. This saves money for larger clients by eliminating the need to enter into separate testing agreements in different regions and helps standardize the testing process. This is evidenced by 99% retention rates in 2024 and an average of 98% since the pandemic. However, while retention rates are high, switching costs are not high enough to allow Pearson to price its product above its cost of capital, and we do not see that changing over our forecast.

In higher education, it also possesses many attributes of intangible assets and switching costs, but ultimately fails to garner a moat. Similar to its assessment segment, Pearson invests heavily in developing curricula, study materials, and platforms for universities and colleges. The firm has a dominant position among the three largest in the industry. The significant gap between this group and its smaller peers means the latter struggle to invest at comparable levels, hindering their ability to deliver products on par with those of Pearson and its large peers.

Another advantage of its size and status within the industry is its relationships with universities. Pearson collaborates closely with colleges and universities to provide products that best meet the evolving needs of teachers and students. Newer or smaller competitors lack access to such feedback, which, combined with their relatively limited resources, makes it challenging for them to offer equally appealing products and stay ahead of the development curve. Pearson’s two peers, McGraw Hill and Houghton Mifflin Harcourt, are of similar size and have similar advantages, which limit the premium Pearson can charge for its expertise and depress returns on invested capital.

Pearson’s higher education business also benefits from switching advantages due to its integration. Pearson provides textbooks and learning materials aligned with curricula designed in conjunction with colleges and universities. Colleges and universities have little incentive to constantly switch providers, as this can increase costs and disrupt students. In addition, given the business' consolidated nature, colleges and universities have few alternatives to consider if they decide to switch. However, with two reputable peers, switching costs are not high enough for Pearson to charge a premium to earn above its cost of capital, and we do not see this happening over our forecast period.

We do not see any moat sources in any of its other segments—English language, virtual learning, and enterprise learning. In the English language segment, Pearson owns the tests it administers, a sign of a potential intangible asset moat. However, Pearson's pricing power is insufficient to cover its cost of capital. In the virtual and enterprise learning and skills segments, Pearson demonstrates some aspects of a switching-cost moat, but this is not significant enough to award a moat.

Pearson's enterprise business is well positioned to take advantage of tailwinds in employee upskilling and reskilling.

The shift to digital could be a major boon for its education business, given its potential to be at a lower cost and more scalable than traditional textbooks.

Areas such as online program management and virtual schools should allow deeper integration with universities and schools.

College enrollments have been trending downward, putting pressure on Pearson's higher education business.

The shift to digital, including a more significant move toward virtual learning, presents a disruption opportunity for competitors, given the lower barriers to entry.

Lower immigration demand into the United States, Canada, and Australia is a macroeconomic tailwind for its English Language business, hampering top-line revenue growth over the medium term.