Head to Head: Pearson vs. Reed Elsevier

LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are publishing giants Pearson (LSE: PSON.L  ) (NYSE: PSO  ) and Reed Elsevier (LSE: REL.L  )   (NYSE: RUK  ) .

Shares in both companies have outperformed the FTSE 100 over the past year. The Footsie is up 2%, but Pearson's shares have risen 4% and Reed Elsevier's 9%.

Let's take our seats at ringside.

Round 1: Earnings Pearson Reed Elsevier
Recent share price (in pence) 1,225 603
Last year price-to-earnings (P/E) 14.2 12.9
Current year forecast P/E 14.4 12.1
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%) 22 1
Current year forecast EPS growth (%) -2 6
Forecast operating margin (%) 14 21

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Reed Elsevier takes the first round comfortably, with lower P/Es and superior forecast EPS growth and operating margin. Pearson manages only a single point, but it's a heavy-hitting one for historic EPS growth.

 

Round 2: Dividends Pearson Reed Elsevier
Last year dividend yield (%) 3.4 3.6
Current year forecast dividend yield (%) 3.6 3.8
Four-year dividend CAGR (%) 7 4
Current year forecast dividend growth (%) 6 7
Forecast dividend cover 1.9 2.2

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Round two is a repeat of round one with Reed Elsevier taking four of the five points. As with historic earnings growth in the first round, Pearson takes a point for historic dividend growth in this round.

Pearson's dividend growth has been comfortably ahead of inflation, but you may be wondering why it has been so much slower than the earnings growth. The reason is that the company has increased its dividend cover from 1.3 times EPS in 2007 to 2.1 times EPS in 2011. That level of cover is at Pearson's target of around 2 times EPS, so future dividends should start to grow more in line with earnings.

 

Round 3: Balance Sheet Pearson Reed Elsevier
Price-to-book (P/B) ratio 1.7 6.3
Net gearing (%) 11 162

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Pearson finishes strongly, taking both points in round three, but it's too little too late. Reed Elsevier emerges victorious by two rounds to one. The overall points tally is: Reed Elsevier, eight, and Pearson, four.

Post-match assessment
Pearson did well on backward-looking earnings and dividend growth, but Reed Elsevier was stronger on forward-looking measures: not only earnings and dividend growth, but also operating margin and dividend cover.

Furthermore, Reed Elsevier took four of the five valuation-ratio points: historic and forecast P/E, and historic and forecast dividend yield. However, while Reed Elsevier was relatively strong on these measures -- indicating it might just be better value than Pearson at the present time -- the forward P/E of 12.1 and dividend yield of 3.8% suggest reasonable, rather than outstanding, value.

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G.A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.
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