This article has been adapted from our sister site across the pond, Fool U.K.
When it comes to making a fortune from the Land of the Free Mega Burger with Every Massive Milkshake, technology companies, oil giants, and fast-growing retailers quickly spring to mind.
In contrast, teaching children math and English does not seem the raw stuff of U.S. capitalism.
Nevertheless, two U.K. companies expect U.S. education to drive their earnings for years to come. But only one has so far earned a gold star.
Copying rewarded
Pearson
And on Monday, Pearson increased its presence with the acquisition of Schoolnet for $230 million. Schoolnet delivers the same sort of integrated educational services to 5 million American pupils that Pearson delivers on a global scale.
Marjorie Scardino, Pearson's chief executive, acknowledged the similarities in her comment on the deal: "Being able to offer a connective digital spine for learning has been Pearson's goal for years. Schoolnet has shared our passion, and together we can make that spine more flexible and powerful for schools, teachers and students."
The all-cash Schoolnet acquisition is expected to break even in 2011, and to boost Pearson's earnings per share from 2012. The 12-year old company's co-founder and CEO Jonathan Harber will stay on at Pearson after the takeover.
Must try harder
While Pearson has been delighting investors, with its share price up 13% since the start of the year, over in the remedial class the LSE-listed Promethean World has continually frustrated those that saw its potential.
After several years of stellar growth as a private equity-backed company, the Blackburn, U.K.-based maker of interactive whiteboards for classrooms has spent its short life as a listed company issuing profit warnings and confounding optimists. Its shares have fallen dramatically since March 2010, as the market has lost confidence.
But could last Tuesday's first-quarter results mark the nadir for this serial disappointer?
True, they were hardly A-grade material. Revenues were down 22% year-on-year to 42 million pounds, with sales of its Learner Response Systems -- which it was hoped would deliver extra income from existing whiteboard customers -- faring particularly poorly, plunging 35%.
Yet I got the sense that Promethean World was finally talking straight by delivering these bald numbers without much puff. The company also claimed that cost-saving measures it implemented to protect profitability in late 2010 have been swiftly achieved, and there was a smidgeon more good news in that revenues from its big Italian schools deal should be booked next quarter.
Promethean World said that it "continues to believe that the long-term demand drivers remain strong, but that market conditions will remain challenging at least through 2011, due to public sector budgetary uncertainties and constraints, and is planning its business on this basis."
The shares have rallied since the update, gaining 14%.
Children are the future
It's a bit of a puzzle why Promethean World should have been buffeted so much by a slowdown in U.S. educational spending while Pearson forges ahead.
However, Pearson's educational business is far more diversified, and outside of its textbook business, it's fairly service-orientated, with a fair amount of recurring revenues. You can easily imagine it would be a lot of upheaval for an educational authority to ditch Pearson as a supplier. In contrast, postponing whiteboard purchasing for a year is an easier decision to make, and one that has clobbered Promethean's major rival, Smart Technologies
The long-term outlook for U.S. educational spending seems potentially rosy. In January, President Obama said his country must boost spending on research and education, describing the challenge posed by China and other emerging rivals as a "Sputnik moment." The administration has set aside some $17 billion to improve schools. American's still-growing population is another positive.
On the negative side is of course the country's large and growing deficit -- so problematic that a stalemate between Democrats and Republicans over how to address it almost led to Washington shutting up shop earlier this month. Americans may want to spend more on education. Whether or not they have the means to do so is another matter.
Pencils down
Either way, if you're bullish on U.S. education then Pearson and Promethean World give you two different ways to play the sector.
Pearson is the pricier pick, trading on a P/E for the current year of 14.6, though paying out a very secure looking dividend of 3.5%. While education dominates its earnings -- in the U.S. and increasingly around the rest of the world -- you also get Penguin books and the Financial Times, too.
Promethean World is more of a gamble, but at least it's a cheap one, even after its recent mini-rally. The shares are on a P/E of just over 10, forecast to fall to 8.5 for 2012. Going on analysts' prediction of a trimmed dividend payout, the shares yield 2.8%.
Obviously with sales and profits still sliding, any such predictions are hugely uncertain. But the bounceback potential is clear -- a recovery to even 2010's full-year earnings would put the shares on a P/E of just 5.5.
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