Pearson (PSON) is a diversified publisher with distinct education, business information, and consumer publishing segments. Its education business, which generates about two thirds of operating profit, benefits from barriers to entry, and we assign the overall company a narrow economic moat.
Pearson's education segment generates about 80% of overall operating profit. We think Pearson is well-entrenched in education publishing and will maintain a competitive advantage as publishing and testing materials gradually make the transition from physical to digital during the next decade. For example, students and professors are increasingly using digital learning tools to supplement traditional textbooks at the higher education level. We believe Pearson is prepared for this transition, as the firm has invested in proprietary education products such as MyLabs, a digital learning, homework, and assessment online programme that complements textbooks. However, the firm faces some headwinds in its K-12 education business, as a majority of the funding for U.S. education depends on state and local government funding, and these entities are facing budget shortfalls.
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