The venerable Washington Post Co.
โพสต์แล้ว: พุธ ก.ค. 21, 2010 9:37 pm
Research Report on The Washington Post Co., first written on April 8, 2010 by Thanapoom Boonipat for the student-run ML Salant Investment Team
[email protected]
The Johns Hopkins University, Biomedical Engineering, 2011.
Based on the report from Barron’s: http://online.barrons.com/article/SB127 ... OL_hpp_mag
[Note, several articles appear long before the Barron’s article (WPO at $4-4.5 billion, e.g. http://widemoatinvesting.wordpress.com/tag/kaplan/ , when WPO was selling for $3.38 billion, 2/27/09]
An interesting observation was that although the Barron’s article basically restated what the previous article—freely available online—did, the stock price jumped nearly 10% (from $440 to $480) when Barron’s published. There was no other news.
Feature
| MONDAY, APRIL 5, 2010
Today's News: Washington Post Is Dirt Cheap
By ANDREW BARY | MORE ARTICLES BY AUTHOR(S)
The Post may be America's most undervalued media company.
WASHINGTON POST MAY BE THE MOST UNDERVALUED media company in America today. That's because investors give it virtually no credit for Kaplan, a large and rapidly growing education division that generates more than half the company's revenue and profit.
Matthew Staver/Bloomberg News
Post CEO Don Graham, cut from the Warren Buffett cloth, rejects a spinoff of the lucrative Kaplan franchise.
Shares of the Post (ticker: WPO) trade for 445, less than half their 2004 peak, and about 50% of Barron's estimate of the company's asset value. Controlled by the founding Graham family, the low-profile Post is a mini conglomerate, operating Kaplan, a cable-TV business with 669,000 basic subscribers, a group of network-TV stations, the Washington Post newspaper and Newsweek magazine.
The Post has a market value of $4.2 billion, but a sum-of-the-parts analysis suggests it is worth $8.5 billion. This analysis is based on the valuations of comparable public companies, not lofty and sometimes unrealistic "private market" estimates often favored by media-stock boosters. At $8.5 billion, the Post would trade for more than $900 a share.
The best way for the company to boost its share price would be to spin off Kaplan, which probably would command a generous valuation in the hot for-profit education sector. Ranked by revenue, it is No. 2 in the industry, behind Apollo Group (APOL).
With $2.6 billion in 2009 revenues and nearly $300 million in pretax operating profit, Kaplan can stand on its own. So can the rest of the Post's operations, largely because of the profits generated by cable TV and the TV stations.
Wall Street likes focused companies, and the media and cable-TV industry has obliged. Time Warner (TWX), Cablevision (CVC), Liberty Media (LINTA) and E.W. Scripps (SSP) have broken up -- all to the benefit of shareholders.
But the Graham family, led by CEO Don Graham, doesn't buy the idea of a breakup of Washington Post. "In whose interest is a Kaplan spinoff?" Graham said last week. "It would be in the interest of the investment bankers doing the deal. It wouldn't be in the interest of Washington Post shareholders."
The 64-year-old Graham, son of the late Katharine Graham, has long been influenced by Warren Buffett, whose Berkshire Hathaway (BRKA) has held a sizable stake in the Post since the 1970s. Buffett hates financial engineering, and has done minimal shuffling of businesses in the 45 years he has controlled Berkshire. Graham agrees. "Over the years, if Kaplan and the other Post properties earn more money, we'll be rewarded in the stock market," Graham says. "It's been our theory since we went public in 1971."
Some suspect the Grahams want to keep Kaplan as a financial security blanket to ensure that if the media business declines in the coming decade, the Washington Post newspaper, the family's treasure, will survive. The talk is that when the Graham family meets, they say: "Thank goodness for Kaplan." Largely because of Kaplan, the Post has avoided some of the trials experienced by newspaper publishers like the New York Times (NYT), McClatchy (MNI) and Gannett (GCI).
EVEN WITHOUT A KAPLAN SPINOFF, Post shares look attractive. Given Kaplan's growth, the Post may come to be seen as an education company and garner a higher stock-market valuation. At the current share price, investors effectively are paying nothing for the noneducation parts of the Post. Says Thomas Russo, a partner at Gardner, Russo, and Gardner, a Lancaster, Pa., investment firm that has been a longtime holder: "The Post is a coiled spring, What releases the spring, I don't know." Russo says he is willing to be patient, betting Post management delivers for holders under the guidance of a top-notch board of directors, led by Buffett.
One potential plus for Washington Post investors is that the company, which hasn't bought back much stock in recent years, may step up share repurchases in 2010 with a new authorization to buy back 750,000 shares, or 8% of the 9.4 million outstanding. The stock appears to have little downside at its current price, and yields 2%.
Table: Hidden Gem
Post shares are thinly traded because the Grahams own 1.3 million of the Class A super-voting shares and an undetermined amount of the publicly traded Class B; Berkshire owns 1.7 million shares. Following the Buffett example, Graham communicates little with Wall Street and the Post gets scant analyst coverage. Graham also follows Buffett's example by taking modest pay. He has drawn a salary of $400,000 a year with no cash bonus since becoming CEO in 1991.
To value the Post, we figured Kaplan is worth $5 billion, or two times 2009 revenue -- a discount to Strayer Education (STRA) and DeVry (DV), two of the for-profit education industry's best operators. Kaplan's profits were depressed in 2009 by one-time charges, but its key business, higher education, had a 33% rise in revenue and a 59% gain in earnings. Kaplan offers multiple degree programs at physical campuses and online. Enrollment in online programs has exploded, hitting 60,000 last year, up from almost nothing a decade ago.
The Post uses phantom Kaplan stock to compensate the division's top executives. Based on the phantom stock price, Kaplan was valued at $2.8 billion at year end, below our $5 billion estimate. The Post's value of Kaplan likely is understated, partly because the company has no incentive to assess Kaplan at a market price; that would force it to pay more to top Kaplan executives, who get the cash value of the phantom stock.
The Post's cable-TV operation could be worth $2 billion, or six times 2009 pretax cash flow, in line with Comcast's (CMCSA) value. We put a $1 billion value on the TV stations, including NBC affiliates in Detroit and Houston.
We conservatively have assigned no value either to the Post newspaper, which lost $72 million last year from operations, or Newsweek, the dominant part of the magazine unit, which lost $29 million in 2009. After sharp cost cuts, the newspaper had a small profit in the fourth quarter and could be in the black this year.
The Post has a healthy balance sheet, with under $100 million in net cash (cash less debt) and about $400 million in securities, mainly shares of Berkshire Hathaway. We put no value on the Post's pension plan, which was overfunded by $409 million at year-end 2009.
Viewed another way, the Post is valued at just five times trailing Ebitda, or earnings before interest, taxes, depreciation and amortization, a common media metric.
It isn't easy to analyze the Post from its reported financials. The company posted earnings of $9.78 a share in 2009, up from $6.87 in '08 but down from $30-plus per share annually from 2005 through 2007. Based on reported 2009 results, the Post trades for a very expensive 45 times earnings.
Graham acknowledged in his annual letter to shareholders that reported earnings looked "awful," but were depressed by numerous one-time charges, including expenses for early retirement of workers at the Post newspaper. While reported net income was less than $100 million, the Post generated $653 million in cash from operations last year.
The Bottom Line
Washington Post could be worth $900 a share, twice its current stock price. A Kaplan spinoff would unlock value.
The private-education industry has gotten bad publicity, including a negative cover story in Barron's ("Leveraging Up to Learn," Nov. 9, 2009). Critics charge many companies entice marginal and badly prepared students into programs that provide them little benefit while leaving them saddled with large debts. Graham addressed critics in the Post's annual letter, saying Kaplan attracts older students with an average age of 34, many of them unsuccessful in college before.
Defaults on federal loans to Kaplan students have risen in recent years, but are well below the threshold that would trigger a federal crackdown. The original Kaplan test-preparation business has struggled, owing to a bevy of competitors, and accounts for only a small part of Kaplan's value.
The Grahams take the long view, and investing in the Washington Post requires patience. The company has valuable businesses that probably are worth a lot more than the stock price, and in time that value ought to be reflected in the shares.
The History of Washington Post Co and Warren Buffett Berkshire Hathaway:
-WPO IPO in 1971, Watergate and other political issue cause price to drop. (the earnings of the company then was mostly from TV, and the politician threatens to revoke their license)
-Berkshire invested in WPO in 1972-1973 for $10 million, for 10% stake ($5.6/share)
-in 2010, Berkshire has 18.4% (buyback increases %) valued at 1-2 billion, depending on market.
[for 1 billion , mkt cap $4billion, 37 years, gain would be at compounded rate of 13% per year]
A quote from Buffett’s 1985 annual letter to shareholder might be of interest:
We bought all of our WPC holdings in mid-1973 at a price of
not more than one-fourth of the then per-share business value of
the enterprise. Calculating the price/value ratio required no
unusual insights. Most security analysts, media brokers, and
media executives would have estimated WPC’s intrinsic business
value at $400 to $500 million just as we did. And its $100
million stock market valuation was published daily for all to
see. Our advantage, rather, was attitude: we had learned from
Ben Graham that the key to successful investing was the purchase
of shares in good businesses when market prices were at a large
discount from underlying business values.
Most institutional investors in the early 1970s, on the
other hand, regarded business value as of only minor relevance
when they were deciding the prices at which they would buy or
sell. This now seems hard to believe. However, these
institutions were then under the spell of academics at
prestigious business schools who were preaching a newly-fashioned
theory: the stock market was totally efficient, and therefore
calculations of business value - and even thought, itself - were
of no importance in investment activities. (We are enormously
indebted to those academics: what could be more advantageous in
an intellectual contest - whether it be bridge, chess, or stock
selection than to have opponents who have been taught that
thinking is a waste of energy?)
Through 1973 and 1974, WPC continued to do fine as a
business, and intrinsic value grew. Nevertheless, by yearend
1974 our WPC holding showed a loss of about 25%, with market
value at $8 million against our cost of $10.6 million. What we
had thought ridiculously cheap a year earlier had become a good
bit cheaper as the market, in its infinite wisdom, marked WPC
stock down to well below 20 cents on the dollar of intrinsic
value.
You know the happy outcome. Kay Graham, CEO of WPC, had the
brains and courage to repurchase large quantities of stock for
the company at those bargain prices, as well as the managerial
skills necessary to dramatically increase business values.
Meanwhile, investors began to recognize the exceptional economics
of the business and the stock price moved closer to underlying
value. Thus, we experienced a triple dip: the company’s business
value soared upward, per-share business value increased
considerably faster because of stock repurchases and, with a
narrowing of the discount, the stock price outpaced the gain in
per-share business value.
We hold all of the WPC shares we bought in 1973, except for
those sold back to the company in 1985’s proportionate
redemption. Proceeds from the redemption plus yearend market
value of our holdings total $221 million.
If we had invested our $10.6 million in any of a half-dozen
media companies that were investment favorites in mid-1973, the
value of our holdings at yearend would have been in the area of
$40 - $60 million. Our gain would have far exceeded the gain in
the general market, an outcome reflecting the exceptional
economics of the media business. The extra $160 million or so we
gained through ownership of WPC came, in very large part, from
the superior nature of the managerial decisions made by Kay as
compared to those made by managers of most media companies. Her
stunning business success has in large part gone unreported but
among Berkshire shareholders it should not go unappreciated.
Warren Buffett is still the lead Director. This is a very significant benefit for the company:
-No significant issue of stock options. Notice management of Kaplan is compensated in cash using ‘phantom’ stock of Kaplan as noted in the Barron’s article.
Granted of only around 25,000 shares, or (25,000/9.25M)=0.2%, options outstanding=1%.
-Conservative financial and smart financing. Company avoided almost all financing mistakes of almost all other American corporations.
A good example: Stock repurchases. Almost all other companies repurchase large amount of stock when the stock is selling at a high price, and stop repurchase entirely during the market crash of 2008-2009, WPO did the opposite:
2009: 145,040 shares, avg price $420/share
2008:167,642 shares, avg price $590/share
2007:54,506 shares, avg price $770.
2006:77,300 shares, avg price $730
2005 and 2004, no share repurchases, price was above $800 for most of the time, and the company was doing extremely well financially.
1999: 744,095 shares, avg price $572
[Notice the increasing number of shares repurchases as price drops and the company’s operation generated less money]
In January, 2010, company announced another significant share repurchase authorization of 750,000 class B shares, which, combined with previously authorized repurchase, will translate into more than 10% shares repurchase authorized.
We believe the company will aggressively take advantage of low stock price to repurchase a large number of shares. Shareholder can expect at least 5-10% appreciation from the repurchase.
The difference between a shares repurchased at discount to intrinsic value (value creation) vs. shares repurchased at premium to intrinsic value (value destroying) can be very significant: Consider a case where a Company have 100 shares outstanding, $100 intrinsic value, $1 per share. The company purchased 20 shares. Consider two simple cases (assume cash=intrinsic value): (1) if the price is $1.2 per share, for total cost of $24, the remaining shareholder will own a company worth $76, 80 shares, or intrinsic value of only $0.95 per share. (2) If the company brought the share at $0.8, for total of $16, the company will be worth $84, or $1.05 per share.
-Well structured long term debt. Net debt is negligible. As of January 3, 2010, WPO have $477.6 million in cash, and over$385 million in other marketable securities.
-
-Extremely well manage pension fund. Overfunded pension plan (300 M overfunded for obligation of $1 billion as of Dec 09) is a very rare situation for any company during this period (2009-2010).
-Long term outlook. Kaplan is an excellent example. Acquired in 1984 for $45 million when the business have revenue of $35 million, losing $4 mil, and through a series of acquisitions totaling $1 billion, Kaplan is now a very big part of WPO.
[An aside: The story of Stanley H. Kaplan and the S.A.T. as explored by Gladwell in the New Yorker article Dec 17, 2001, “Examined Life” might be interesting to some: http://www.gladwell.com/2001/2001_12_17_a_kaplan.htm]
-In 1998, the Washington Post, TV stations, and Newsweek accounted for 75% of Revenue. In 2008,70% came from Kaplan and Cable ONE.
Valuation: The sum of the parts (based on facts plainly stated in the annual report, as recognized by the articles)
Total value=$5.9 billion
1) Berkshire stocks: On April 8, 2010 closing market= $285 million
At January 3: 2,214 shares of Berkshire Hathaway Inc. (“Berkshire”)
Class A common stock and 8,485 shares of Berkshire
Class B common stock. The Company’s ownership of
Berkshire accounted for $247.5 million.
Jan 21, 2010, BRK.B split 50:1. So company own 8485*50 class B. At $80, =21,212,500, class A at 119400=264,351,600
Other Securities, mostly common stock of publicly traded education company: $106.4 million as of January 3, 2010.
2)
Overfunded pension even after conservative assumptions: $300 million
Note : The Company’s expected return on plan
assets assumption remained at 6.5% for fiscal years 2009, 2008
and 2007.
The 6.5% assumed is significantly less than at most companies (7-9%) and result in higher pension expense. A 1% reduction in assumed return decrease income by roughly $20 million.
SERP is for executive pension plan
Of the roughly $1 billion in US equities, $160 million is Berkshire stock.
Although definitive information was not disclosed, it is clear that the two outstanding value investment firms are Ruane, Cunniff & Goldfarb and Sandy Gottesman’s First Manhattan (a billionaire investor in Berkshire). The well managed pension has result in significant benefit to WPO. A good example is the year 2009 $64 million early retirement charge to income, but funded entirely by overfunded pension assets. The company did not have to spend cash to cover pension expense for some years.
2) Cable ONE: $1 billion
A cable company operating in small towns and cities.
Provide high speed internet, data, Cable TV, and telephone services to customers. Compete with Satellite TV (e.g. DirecTV), telephone companies (AT&T), and cable companies (e.g. Comcast).
Valueline composite
Notice large amount of debt. Comcast, by far the biggest in the composite, have PE of around 15
Cable ONE
(in millions) 2009 2008 2007
Revenue 750 719 626
Income after share of overhead (20) 149 142 103
Depreciation 124 121 108
CapEx 84 114 138
Earnings after tax (37%) 93.87 89.46 64.89
18.34411
Note: Depreciation approximate CapEx, as seen
Valuation: PE of 13 1220.31
2009 was a very good year for Cable ONE, hence the lower PE used compared to average
Note also that Cable ONE have no debt, a very rare situation for cable companies
3) Kaplan: $4.5 billion
How the ‘stock option’ for Kaplan work: Company’s compensation committee value entire company each year according to earnings, prospects, and valuations of other similar companies. All options are valued accordingly. Changes in option value record as debit or credit.
A comparison to Apollo Group, the biggest of the higher education firms:
Kaplan has net revenue of $2.6 billion in 2009
Apollo Group: $4 billion in 2009, with market cap of $9.3 billion as of April 8, 2010.
The higher education companies have some issues: the government is accusing these companies of various violations. The SEC is also inquiring about Apollo’s revenue recognition practices. As a consequence, Apollo is selling for around PE 13-15 (on 2009 earnings of $600 million).
-A simple revenue comparison would put Kaplan’s Higher Education market cap at $3.5 billion.
-Assume Supplemental Education is equal to sales (conservative since Test prep can be very a very good businesses and International growth potential inherited in the supplemental education portion). This adds another $1 billion.
valueline composite
Note: PE and Price/Rev seems high because profit is going up rapidly. PE based on forecasted earnings is around 15.
If we use price/rev of 2, 2.6 billion*2=$5.2 billion. [Using PE is not accurate since the earnings is affected by arbitrary things, DCF is also hard to do since Kaplan is investing heavily in certain ventures that require large amount of cash.]
DCF Kaplan: $5.2 billion
The risks:
-Kaplan, an education based business, unlike businesses such as Cable TV or Coca Cola, is extremely reliance on good management. As many students preparing for exams have realize, reputation, not price, is the determining factor.
-Higher education division: Around 70% of student paid with loans issued by the government under Title IV Federal Student Aid program. A school cannot derive more than 90% of tuition from this source, and students that graduated must maintain default rate of less than 20%. If these provisions is not met, the government can revoke license or withdraw funding, which will have a significant impact. The company has maintained all ratios. Title IV accounts for around 50% of Kaplan Inc.
-Government policy change will severely affect the company.
4) TV stations:$430 million
TV Broadcasting
(in millions) 2009 2008 2007
Revenue 272 325 339
Income 70 123 142
Depreciation 12 9.4 9.4
CapEx 13 40 17.6
Cash flow (37%) 43.1 46.89 81.26
Cash flow is income(1-tax)+depreciation-CapEx
PE:10
Value= 431
Notice other companies have significant debt. For example, Belo have 1 billion in debt, will earn around $30 million in 2010, and still have market cap of 768M.
5)
The Washington Post Co and Newsweek: $400 million
In 2009, Company losses $33 million in cash. Management commit to at least not lose money.
AH Belo, a company with newspaper revenue slightly less than The Post, losing money, but with no debt, command market cap of $100 M.
New York Times, with around $1 billion in debt, revenue of $2.4 billion, unprofitable, have market cap of more than $1 billion.
A newspaper with a good name is still very desirable for noneconomic reasons.
Newspaper and Magazine
(in millions) 2009 2008 2007
Rev 863 1051 1177
Income -192 -208 97
Depreciation 77 67 40
Pension expense -50 -60 0
CapEx 53 32.7 36
Cash Flow -46.96 -36.74 65.11
Asset 858 930 1669
Conclusion:
Based on reasonable and conservative assumptions, WPO have a value of at least $5.9 billion. (Contingent on Kaplan being worth the price-with no government action) The demonstrated focus on shareholder (The Graham family have practically all its net worth in WPO), the conservative capital structure, and large share buyback, practically guarantee that the company will not run into unexpected financial difficulties. The market cap for 9.25 million shares outstanding, price of $490/share, is $4.5 billion. If a very significant discount exist, then a commitment would certainly be attractive.
[email protected]
The Johns Hopkins University, Biomedical Engineering, 2011.
Based on the report from Barron’s: http://online.barrons.com/article/SB127 ... OL_hpp_mag
[Note, several articles appear long before the Barron’s article (WPO at $4-4.5 billion, e.g. http://widemoatinvesting.wordpress.com/tag/kaplan/ , when WPO was selling for $3.38 billion, 2/27/09]
An interesting observation was that although the Barron’s article basically restated what the previous article—freely available online—did, the stock price jumped nearly 10% (from $440 to $480) when Barron’s published. There was no other news.
Feature
| MONDAY, APRIL 5, 2010
Today's News: Washington Post Is Dirt Cheap
By ANDREW BARY | MORE ARTICLES BY AUTHOR(S)
The Post may be America's most undervalued media company.
WASHINGTON POST MAY BE THE MOST UNDERVALUED media company in America today. That's because investors give it virtually no credit for Kaplan, a large and rapidly growing education division that generates more than half the company's revenue and profit.
Matthew Staver/Bloomberg News
Post CEO Don Graham, cut from the Warren Buffett cloth, rejects a spinoff of the lucrative Kaplan franchise.
Shares of the Post (ticker: WPO) trade for 445, less than half their 2004 peak, and about 50% of Barron's estimate of the company's asset value. Controlled by the founding Graham family, the low-profile Post is a mini conglomerate, operating Kaplan, a cable-TV business with 669,000 basic subscribers, a group of network-TV stations, the Washington Post newspaper and Newsweek magazine.
The Post has a market value of $4.2 billion, but a sum-of-the-parts analysis suggests it is worth $8.5 billion. This analysis is based on the valuations of comparable public companies, not lofty and sometimes unrealistic "private market" estimates often favored by media-stock boosters. At $8.5 billion, the Post would trade for more than $900 a share.
The best way for the company to boost its share price would be to spin off Kaplan, which probably would command a generous valuation in the hot for-profit education sector. Ranked by revenue, it is No. 2 in the industry, behind Apollo Group (APOL).
With $2.6 billion in 2009 revenues and nearly $300 million in pretax operating profit, Kaplan can stand on its own. So can the rest of the Post's operations, largely because of the profits generated by cable TV and the TV stations.
Wall Street likes focused companies, and the media and cable-TV industry has obliged. Time Warner (TWX), Cablevision (CVC), Liberty Media (LINTA) and E.W. Scripps (SSP) have broken up -- all to the benefit of shareholders.
But the Graham family, led by CEO Don Graham, doesn't buy the idea of a breakup of Washington Post. "In whose interest is a Kaplan spinoff?" Graham said last week. "It would be in the interest of the investment bankers doing the deal. It wouldn't be in the interest of Washington Post shareholders."
The 64-year-old Graham, son of the late Katharine Graham, has long been influenced by Warren Buffett, whose Berkshire Hathaway (BRKA) has held a sizable stake in the Post since the 1970s. Buffett hates financial engineering, and has done minimal shuffling of businesses in the 45 years he has controlled Berkshire. Graham agrees. "Over the years, if Kaplan and the other Post properties earn more money, we'll be rewarded in the stock market," Graham says. "It's been our theory since we went public in 1971."
Some suspect the Grahams want to keep Kaplan as a financial security blanket to ensure that if the media business declines in the coming decade, the Washington Post newspaper, the family's treasure, will survive. The talk is that when the Graham family meets, they say: "Thank goodness for Kaplan." Largely because of Kaplan, the Post has avoided some of the trials experienced by newspaper publishers like the New York Times (NYT), McClatchy (MNI) and Gannett (GCI).
EVEN WITHOUT A KAPLAN SPINOFF, Post shares look attractive. Given Kaplan's growth, the Post may come to be seen as an education company and garner a higher stock-market valuation. At the current share price, investors effectively are paying nothing for the noneducation parts of the Post. Says Thomas Russo, a partner at Gardner, Russo, and Gardner, a Lancaster, Pa., investment firm that has been a longtime holder: "The Post is a coiled spring, What releases the spring, I don't know." Russo says he is willing to be patient, betting Post management delivers for holders under the guidance of a top-notch board of directors, led by Buffett.
One potential plus for Washington Post investors is that the company, which hasn't bought back much stock in recent years, may step up share repurchases in 2010 with a new authorization to buy back 750,000 shares, or 8% of the 9.4 million outstanding. The stock appears to have little downside at its current price, and yields 2%.
Table: Hidden Gem
Post shares are thinly traded because the Grahams own 1.3 million of the Class A super-voting shares and an undetermined amount of the publicly traded Class B; Berkshire owns 1.7 million shares. Following the Buffett example, Graham communicates little with Wall Street and the Post gets scant analyst coverage. Graham also follows Buffett's example by taking modest pay. He has drawn a salary of $400,000 a year with no cash bonus since becoming CEO in 1991.
To value the Post, we figured Kaplan is worth $5 billion, or two times 2009 revenue -- a discount to Strayer Education (STRA) and DeVry (DV), two of the for-profit education industry's best operators. Kaplan's profits were depressed in 2009 by one-time charges, but its key business, higher education, had a 33% rise in revenue and a 59% gain in earnings. Kaplan offers multiple degree programs at physical campuses and online. Enrollment in online programs has exploded, hitting 60,000 last year, up from almost nothing a decade ago.
The Post uses phantom Kaplan stock to compensate the division's top executives. Based on the phantom stock price, Kaplan was valued at $2.8 billion at year end, below our $5 billion estimate. The Post's value of Kaplan likely is understated, partly because the company has no incentive to assess Kaplan at a market price; that would force it to pay more to top Kaplan executives, who get the cash value of the phantom stock.
The Post's cable-TV operation could be worth $2 billion, or six times 2009 pretax cash flow, in line with Comcast's (CMCSA) value. We put a $1 billion value on the TV stations, including NBC affiliates in Detroit and Houston.
We conservatively have assigned no value either to the Post newspaper, which lost $72 million last year from operations, or Newsweek, the dominant part of the magazine unit, which lost $29 million in 2009. After sharp cost cuts, the newspaper had a small profit in the fourth quarter and could be in the black this year.
The Post has a healthy balance sheet, with under $100 million in net cash (cash less debt) and about $400 million in securities, mainly shares of Berkshire Hathaway. We put no value on the Post's pension plan, which was overfunded by $409 million at year-end 2009.
Viewed another way, the Post is valued at just five times trailing Ebitda, or earnings before interest, taxes, depreciation and amortization, a common media metric.
It isn't easy to analyze the Post from its reported financials. The company posted earnings of $9.78 a share in 2009, up from $6.87 in '08 but down from $30-plus per share annually from 2005 through 2007. Based on reported 2009 results, the Post trades for a very expensive 45 times earnings.
Graham acknowledged in his annual letter to shareholders that reported earnings looked "awful," but were depressed by numerous one-time charges, including expenses for early retirement of workers at the Post newspaper. While reported net income was less than $100 million, the Post generated $653 million in cash from operations last year.
The Bottom Line
Washington Post could be worth $900 a share, twice its current stock price. A Kaplan spinoff would unlock value.
The private-education industry has gotten bad publicity, including a negative cover story in Barron's ("Leveraging Up to Learn," Nov. 9, 2009). Critics charge many companies entice marginal and badly prepared students into programs that provide them little benefit while leaving them saddled with large debts. Graham addressed critics in the Post's annual letter, saying Kaplan attracts older students with an average age of 34, many of them unsuccessful in college before.
Defaults on federal loans to Kaplan students have risen in recent years, but are well below the threshold that would trigger a federal crackdown. The original Kaplan test-preparation business has struggled, owing to a bevy of competitors, and accounts for only a small part of Kaplan's value.
The Grahams take the long view, and investing in the Washington Post requires patience. The company has valuable businesses that probably are worth a lot more than the stock price, and in time that value ought to be reflected in the shares.
The History of Washington Post Co and Warren Buffett Berkshire Hathaway:
-WPO IPO in 1971, Watergate and other political issue cause price to drop. (the earnings of the company then was mostly from TV, and the politician threatens to revoke their license)
-Berkshire invested in WPO in 1972-1973 for $10 million, for 10% stake ($5.6/share)
-in 2010, Berkshire has 18.4% (buyback increases %) valued at 1-2 billion, depending on market.
[for 1 billion , mkt cap $4billion, 37 years, gain would be at compounded rate of 13% per year]
A quote from Buffett’s 1985 annual letter to shareholder might be of interest:
We bought all of our WPC holdings in mid-1973 at a price of
not more than one-fourth of the then per-share business value of
the enterprise. Calculating the price/value ratio required no
unusual insights. Most security analysts, media brokers, and
media executives would have estimated WPC’s intrinsic business
value at $400 to $500 million just as we did. And its $100
million stock market valuation was published daily for all to
see. Our advantage, rather, was attitude: we had learned from
Ben Graham that the key to successful investing was the purchase
of shares in good businesses when market prices were at a large
discount from underlying business values.
Most institutional investors in the early 1970s, on the
other hand, regarded business value as of only minor relevance
when they were deciding the prices at which they would buy or
sell. This now seems hard to believe. However, these
institutions were then under the spell of academics at
prestigious business schools who were preaching a newly-fashioned
theory: the stock market was totally efficient, and therefore
calculations of business value - and even thought, itself - were
of no importance in investment activities. (We are enormously
indebted to those academics: what could be more advantageous in
an intellectual contest - whether it be bridge, chess, or stock
selection than to have opponents who have been taught that
thinking is a waste of energy?)
Through 1973 and 1974, WPC continued to do fine as a
business, and intrinsic value grew. Nevertheless, by yearend
1974 our WPC holding showed a loss of about 25%, with market
value at $8 million against our cost of $10.6 million. What we
had thought ridiculously cheap a year earlier had become a good
bit cheaper as the market, in its infinite wisdom, marked WPC
stock down to well below 20 cents on the dollar of intrinsic
value.
You know the happy outcome. Kay Graham, CEO of WPC, had the
brains and courage to repurchase large quantities of stock for
the company at those bargain prices, as well as the managerial
skills necessary to dramatically increase business values.
Meanwhile, investors began to recognize the exceptional economics
of the business and the stock price moved closer to underlying
value. Thus, we experienced a triple dip: the company’s business
value soared upward, per-share business value increased
considerably faster because of stock repurchases and, with a
narrowing of the discount, the stock price outpaced the gain in
per-share business value.
We hold all of the WPC shares we bought in 1973, except for
those sold back to the company in 1985’s proportionate
redemption. Proceeds from the redemption plus yearend market
value of our holdings total $221 million.
If we had invested our $10.6 million in any of a half-dozen
media companies that were investment favorites in mid-1973, the
value of our holdings at yearend would have been in the area of
$40 - $60 million. Our gain would have far exceeded the gain in
the general market, an outcome reflecting the exceptional
economics of the media business. The extra $160 million or so we
gained through ownership of WPC came, in very large part, from
the superior nature of the managerial decisions made by Kay as
compared to those made by managers of most media companies. Her
stunning business success has in large part gone unreported but
among Berkshire shareholders it should not go unappreciated.
Warren Buffett is still the lead Director. This is a very significant benefit for the company:
-No significant issue of stock options. Notice management of Kaplan is compensated in cash using ‘phantom’ stock of Kaplan as noted in the Barron’s article.
Granted of only around 25,000 shares, or (25,000/9.25M)=0.2%, options outstanding=1%.
-Conservative financial and smart financing. Company avoided almost all financing mistakes of almost all other American corporations.
A good example: Stock repurchases. Almost all other companies repurchase large amount of stock when the stock is selling at a high price, and stop repurchase entirely during the market crash of 2008-2009, WPO did the opposite:
2009: 145,040 shares, avg price $420/share
2008:167,642 shares, avg price $590/share
2007:54,506 shares, avg price $770.
2006:77,300 shares, avg price $730
2005 and 2004, no share repurchases, price was above $800 for most of the time, and the company was doing extremely well financially.
1999: 744,095 shares, avg price $572
[Notice the increasing number of shares repurchases as price drops and the company’s operation generated less money]
In January, 2010, company announced another significant share repurchase authorization of 750,000 class B shares, which, combined with previously authorized repurchase, will translate into more than 10% shares repurchase authorized.
We believe the company will aggressively take advantage of low stock price to repurchase a large number of shares. Shareholder can expect at least 5-10% appreciation from the repurchase.
The difference between a shares repurchased at discount to intrinsic value (value creation) vs. shares repurchased at premium to intrinsic value (value destroying) can be very significant: Consider a case where a Company have 100 shares outstanding, $100 intrinsic value, $1 per share. The company purchased 20 shares. Consider two simple cases (assume cash=intrinsic value): (1) if the price is $1.2 per share, for total cost of $24, the remaining shareholder will own a company worth $76, 80 shares, or intrinsic value of only $0.95 per share. (2) If the company brought the share at $0.8, for total of $16, the company will be worth $84, or $1.05 per share.
-Well structured long term debt. Net debt is negligible. As of January 3, 2010, WPO have $477.6 million in cash, and over$385 million in other marketable securities.
-
-Extremely well manage pension fund. Overfunded pension plan (300 M overfunded for obligation of $1 billion as of Dec 09) is a very rare situation for any company during this period (2009-2010).
-Long term outlook. Kaplan is an excellent example. Acquired in 1984 for $45 million when the business have revenue of $35 million, losing $4 mil, and through a series of acquisitions totaling $1 billion, Kaplan is now a very big part of WPO.
[An aside: The story of Stanley H. Kaplan and the S.A.T. as explored by Gladwell in the New Yorker article Dec 17, 2001, “Examined Life” might be interesting to some: http://www.gladwell.com/2001/2001_12_17_a_kaplan.htm]
-In 1998, the Washington Post, TV stations, and Newsweek accounted for 75% of Revenue. In 2008,70% came from Kaplan and Cable ONE.
Valuation: The sum of the parts (based on facts plainly stated in the annual report, as recognized by the articles)
Total value=$5.9 billion
1) Berkshire stocks: On April 8, 2010 closing market= $285 million
At January 3: 2,214 shares of Berkshire Hathaway Inc. (“Berkshire”)
Class A common stock and 8,485 shares of Berkshire
Class B common stock. The Company’s ownership of
Berkshire accounted for $247.5 million.
Jan 21, 2010, BRK.B split 50:1. So company own 8485*50 class B. At $80, =21,212,500, class A at 119400=264,351,600
Other Securities, mostly common stock of publicly traded education company: $106.4 million as of January 3, 2010.
2)
Overfunded pension even after conservative assumptions: $300 million
Note : The Company’s expected return on plan
assets assumption remained at 6.5% for fiscal years 2009, 2008
and 2007.
The 6.5% assumed is significantly less than at most companies (7-9%) and result in higher pension expense. A 1% reduction in assumed return decrease income by roughly $20 million.
SERP is for executive pension plan
Of the roughly $1 billion in US equities, $160 million is Berkshire stock.
Although definitive information was not disclosed, it is clear that the two outstanding value investment firms are Ruane, Cunniff & Goldfarb and Sandy Gottesman’s First Manhattan (a billionaire investor in Berkshire). The well managed pension has result in significant benefit to WPO. A good example is the year 2009 $64 million early retirement charge to income, but funded entirely by overfunded pension assets. The company did not have to spend cash to cover pension expense for some years.
2) Cable ONE: $1 billion
A cable company operating in small towns and cities.
Provide high speed internet, data, Cable TV, and telephone services to customers. Compete with Satellite TV (e.g. DirecTV), telephone companies (AT&T), and cable companies (e.g. Comcast).
Valueline composite
Notice large amount of debt. Comcast, by far the biggest in the composite, have PE of around 15
Cable ONE
(in millions) 2009 2008 2007
Revenue 750 719 626
Income after share of overhead (20) 149 142 103
Depreciation 124 121 108
CapEx 84 114 138
Earnings after tax (37%) 93.87 89.46 64.89
18.34411
Note: Depreciation approximate CapEx, as seen
Valuation: PE of 13 1220.31
2009 was a very good year for Cable ONE, hence the lower PE used compared to average
Note also that Cable ONE have no debt, a very rare situation for cable companies
3) Kaplan: $4.5 billion
How the ‘stock option’ for Kaplan work: Company’s compensation committee value entire company each year according to earnings, prospects, and valuations of other similar companies. All options are valued accordingly. Changes in option value record as debit or credit.
A comparison to Apollo Group, the biggest of the higher education firms:
Kaplan has net revenue of $2.6 billion in 2009
Apollo Group: $4 billion in 2009, with market cap of $9.3 billion as of April 8, 2010.
The higher education companies have some issues: the government is accusing these companies of various violations. The SEC is also inquiring about Apollo’s revenue recognition practices. As a consequence, Apollo is selling for around PE 13-15 (on 2009 earnings of $600 million).
-A simple revenue comparison would put Kaplan’s Higher Education market cap at $3.5 billion.
-Assume Supplemental Education is equal to sales (conservative since Test prep can be very a very good businesses and International growth potential inherited in the supplemental education portion). This adds another $1 billion.
valueline composite
Note: PE and Price/Rev seems high because profit is going up rapidly. PE based on forecasted earnings is around 15.
If we use price/rev of 2, 2.6 billion*2=$5.2 billion. [Using PE is not accurate since the earnings is affected by arbitrary things, DCF is also hard to do since Kaplan is investing heavily in certain ventures that require large amount of cash.]
DCF Kaplan: $5.2 billion
The risks:
-Kaplan, an education based business, unlike businesses such as Cable TV or Coca Cola, is extremely reliance on good management. As many students preparing for exams have realize, reputation, not price, is the determining factor.
-Higher education division: Around 70% of student paid with loans issued by the government under Title IV Federal Student Aid program. A school cannot derive more than 90% of tuition from this source, and students that graduated must maintain default rate of less than 20%. If these provisions is not met, the government can revoke license or withdraw funding, which will have a significant impact. The company has maintained all ratios. Title IV accounts for around 50% of Kaplan Inc.
-Government policy change will severely affect the company.
4) TV stations:$430 million
TV Broadcasting
(in millions) 2009 2008 2007
Revenue 272 325 339
Income 70 123 142
Depreciation 12 9.4 9.4
CapEx 13 40 17.6
Cash flow (37%) 43.1 46.89 81.26
Cash flow is income(1-tax)+depreciation-CapEx
PE:10
Value= 431
Notice other companies have significant debt. For example, Belo have 1 billion in debt, will earn around $30 million in 2010, and still have market cap of 768M.
5)
The Washington Post Co and Newsweek: $400 million
In 2009, Company losses $33 million in cash. Management commit to at least not lose money.
AH Belo, a company with newspaper revenue slightly less than The Post, losing money, but with no debt, command market cap of $100 M.
New York Times, with around $1 billion in debt, revenue of $2.4 billion, unprofitable, have market cap of more than $1 billion.
A newspaper with a good name is still very desirable for noneconomic reasons.
Newspaper and Magazine
(in millions) 2009 2008 2007
Rev 863 1051 1177
Income -192 -208 97
Depreciation 77 67 40
Pension expense -50 -60 0
CapEx 53 32.7 36
Cash Flow -46.96 -36.74 65.11
Asset 858 930 1669
Conclusion:
Based on reasonable and conservative assumptions, WPO have a value of at least $5.9 billion. (Contingent on Kaplan being worth the price-with no government action) The demonstrated focus on shareholder (The Graham family have practically all its net worth in WPO), the conservative capital structure, and large share buyback, practically guarantee that the company will not run into unexpected financial difficulties. The market cap for 9.25 million shares outstanding, price of $490/share, is $4.5 billion. If a very significant discount exist, then a commitment would certainly be attractive.