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Pearson is top of the class

George Bush’s activities have certainly done wonders for the share prices of defence firms in recent years. Now the market is wondering if his policies may soon do the same for the education sector.

George Bush's activities have certainly done wonders for the share prices of defence firms in recent years. Now the market is wondering if his policies may soon do the same for the education sector.

In 2002, he introduced the No Child Left Behind Act (NCLB), which, in its attempts to measure children's progress at junior schools, has triggered a boom in school testing, says Dominic Rushe in The Sunday Times. The legislation is expected to cost the US government $26.5bn (£15.5bn) in 2006, with $1bn of that spent on benchmark tests. But Bush is now talking of expanding the NCLB programme beyond junior schools, which could mean spending rises much further.

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Three companies dominate this market. Reed Elsevier (REL, 520p), US firm McGraw Hill (NYSE:MHP, $53.34), and Pearson (PSON, 674p). In recent years, the latter has probably been best known for "the persistent underperformance of its shares relative to the rest of the market", says The Sunday Telegraph.

But that may soon change. The publishing group is well known for owning Penguin Books, the FT and half of The Economist, but it makes most of its money from its education arm, producing market-leading textbooks and providing exam-marking services, mainly in the US.

In 2000, Pearson spent $2.5bn on National Computer Systems, which processes around 40 million tests a year in the US and provides software for schools. And as Bush Junior continues to push education, its position looks better and better. The education business grew 13% in the first nine months of the year, and its testing business is up 20% over the same period, winning contracts from its competitors and driving technological improvements (such as online tests) that are cutting paperwork for teachers.

Last year, education accounted for about 65% of Pearson's £455m adjusted operating profit, despite the weak dollar, which nearly knocked 50% off the overall profit figure. Pearson shares don't immediately look cheap on a p/e of over 20 times this year and 17 times next year, but they do offer a yield of about 4%, and with earnings per share rising at around 17%, a 2006 price-to-growth ratio of 1 is not expensive.

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