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Washington Post: Buy a Media Company and Receive a Free For-Profit Education Company

September 05, 2011 | About:
FetchXL

FetchXL

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The year was 1998 and my first job out of college was at the Omaha World-Herald Company, publisher of the largest newspaper in Nebraska. The company was employee-owned and their approach was to re-invest the massive amounts of cash generated by the newspapers into other assets. It was actually a pretty neat structure developed by the former owner, Peter Kiewit, to make sure his home town newspaper would never be sold to an outsider following his death. The bylaws required employees to give up any proceeds over book value if the company was sold. Those old printers may well have been printing cash because the amount of capital that needed to be re-invested was significant. A lot of this cash was re-invested into other media companies, mostly direct marketing and community newspapers. We made a few investments outside of these markets including the largest provider of election systems in the world.

Fast forward to 2011 and the newspaper business is almost unrecognizable. Thanks to the Internet and Craigslist the sacred cash cow of the newspapers, classified advertising, has been sent out for slaughter. Fortunately for shareholders of the Washington Post, the company’s board (including the Graham Family and Warren Buffett) reinvested the company’s cash into non-newspaper assets including cable television, television broadcasting and education. The result is a company named after its flagship newspaper that generates less than 15% of its revenue and none of its profits from newspapers (thanks Craigslist).

The move into non-newspaper businesses was good to shareholders, hitting a record high share price of almost $1,000 in 2005. The stock is trading in the $330s this week and it looks like a steal to me. Why? Because Mr. Market is so down on the for-profit education business that he’s giving it away for free if you buy the cable and broadcast television businesses.

Here’s the math:

Cable Television Business

3-year average EBITDA: $288.8 million

Industry average multiple: 6.0x

Fair market value: $1.7 billion

Broadcast Television Business3-year average EBITDA: $116.6 million

Industry average multiple: 6.0x

Fair market value: $0.7 billion

The total fair market value of these two segments is $2.4 billion. The company has $260 million of cash in excess of its interest-bearing debt which results in an enterprise value of $2.7 billion. The most recent 10-Q gives us 7,933,000 shares outstanding on a diluted basis which results in a market value of $2.7 billion using a share price of $340.

Mr. Market has priced his shares in Washington Post at almost the exact value of these two businesses. Here’s what he is giving us for free.

Education Business

3-year average EBITDA: $339.6 million

Industry average multiple: 4.0x

Fair market value: $1.4 billion

If you add these three businesses together along with the net cash the company is worth $3.8 billion, or $512 per share.

Mr. Market is also throwing in the largest newspaper in one of the most influential cities in the world. Since the newspaper business is operating at break-even I can’t assign any value to it. Think of it like the lottery ticket your mom gives you with your birthday presents — it’s probably worth nothing but there’s a small chance it’s worth something.

This break-up approach ignores the negative EBITDA from the company’s other businesses and its corporate office. The corporate office expense would likely be reduced if the company closed the education business which represented 61% of the 2010 revenue.

On a cash flow basis my discounted cash flow model is coming up with a value of $565 per share based on the company’s historical performance. Some of this value will depend on the impact of the federal financial aid reform targeted at for-profit education. This is not a small issue but I think it’s a good risk-reward trade off since I’m paying nothing for the education business. Reforms are likely to impact some of the for-profit education companies since they will look at student loan default rates and gainful employment post-graduation to determine a school’s eligibility for federal financial aid. In my opinion, it’s more likely to impact degree mills and schools like the Art Institutes more than the company’s schools which focus on healthcare, IT and legal. The ROI of a degree in these industries still makes financial sense and I don’t see that changing much in the future.

I really like the stability of the cable TV business and to a lesser extent, the broadcast TV business. Wireless data networks and Hulu are long-term threats, but at 6x EBITDA those threats are priced into the valuation in my opinion.

My first boss at the Omaha World-Herald Company always told me to have an opinion. My opinion is that I would not sell Mr. Market my shares of Washington Post for less than $500 today.

Disclosure: I have been buying shares of WPO this week. Kaplan Schweser, a division of the Washington Post, is an advertiser on AnalystForum, a company I own.

PDF version of the DCF model using FetchXL:

http://www.valueinvestinglab.com/downloads/wpo_dcf.pdf

About the author:

FetchXL
In 2005 I started a company called FetchXL to deliver a cost-effective solution for retrieving data into Microsoft Excel.

Visit FetchXL 's Website


Rating: 3.7/5 (12 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 3 years ago


For profit education (that relies on government-backed student loans) is dead.

Using trailing 3-year numbers for that division is idiotic.

Print media is also virtually dead. Most newspapers and magazines are losing money.

Buying WPO is like buying Borders or Barnes and Noble. A one-way ticket down.

FetchXL
FetchXL - 3 years ago
Thanks for the comment. I think it's illustrative of the market's opinion that this is a print media company when in reality only 15% of revenue and none of the earning are from print. As I mentioned in the post, I've assigned a goose egg to the print businesses.

Your opinion about for-profit education may very well be prove to be accurate but I don't foresee any policy that will kill off the for-profits that won't have a severe impact on the non-profits. As a result, I think it's a pretty extreme position to take that these companies will disappear. I'm pretty libertarian and philosophically it's one of the few industries where I think the government does have a role to play in providing access to higher education.Should they be providing capital buy homes and apartments? I don't think so but access to education is something I see the government being involved in for a long time. Regardless of my opinion, when I look at this from a purely financial (i.e. greedy) perspective I don't see a scenario where for-profits are excluded from participation in the federal student financial aid process. The good news is that, as I also mentioned in the post, you are paying a goose egg for the education business at these prices so if you are right and the for-profits are excluded from federal financial aid there should be little downside at these prices.

The cable TV business is a consistent cash generator and the broadcast TV business is not doing too bad either from a free cash flow perspective. These are the businesses you are really paying for when you buy shares of WPO, everything else is just a free option.

How much would you pay for a European option to buy shares of Apollo Group for $1 per share in 5 years (it's trading hands at $45 right now)?
batbeer2
Batbeer2 premium member - 3 years ago
I think there is an opportunity to grow for decent for-profits. The states can't afford to fund schools they would otherwise get for free.... that simple.

The not-for-profits as a group get state funding in addition to the tuiton fees they collect from students. They have 80% of the market. State budgets are under pressure while the federal budget for title IV has been dramatically expanded. What happens if the states cut the budget for their colleges in half ?

This is distinct possibility. State politicians can have their picture in the paper cutting ribbons, opening new schools and it they can reduce spending at the same time....
tonyg34
Tonyg34 - 3 years ago
I have read several posts like this one in the not too distant past (several by James Altucher). WPO keeps making money and losing market cap. Something like 60% of sales come from Kaplan, right? So instead of viewing this as a media company with a free for profit play, I think it makes more sense to view the investment as a for-profit with additional media liabilities. A dumb point since the article is taking a value perspective but worth considering if you want to understand how shares are trading/being perceived in the market.

My main problem is that none of the operating divisions at WPO have any real competitive advantages or clear catalysts for a turnaround. Buying stock = owning a small part of a company, so focus on business quality and worry about the numbers later, when considering a new investment. The author's approach is the exact opposite, a deal by the numbers with no consideration for the underlying businesses. According to this report released in Feb of this year, 11 of the Kaplan owned schools failed the 90/10 rule and Kaplan is largely considered one of the least reputable degree mills.

http://federalstudentaid.ed.gov/datacenter/proprietary.html

When WPO becomes the largest net-net stock by market cap in recorded history, I'll be right there to buy it with you. Till then there are better media companies and better for profit schools.
FetchXL
FetchXL - 3 years ago
Tony, I pulled up the 2011 report in Excel format and it showed that all 22 of the Kaplan programs were under the 90% revenue threshold. Am I looking in the wrong place?

Also, from the company's 2010 10-K:

"The 90/10 Rule. Prior to the enactment of the Higher Education Opportunity Act, any for-profit postsecondary institution (a category that includes all of the schools in Kaplan Higher Education) would lose its Title IV eligibility for at least one year if more than 90% of the institution’s receipts for any fiscal year were derived from Title IV programs, as calculated on a cash basis in accordance with the Federal Higher Education Act and applicable Department of Education regulations. Under amendments to the Federal Higher Education Act, a for-profit institution loses its eligibility to participate in the Title IV programs for a period of at least two fiscal years if the institution derives more than 90% of its receipts from Title IV programs in each of two consecutive fiscal years, commencing with the institution’s first fiscal year that ends after August 14, 2008. An institution with Title IV receipts exceeding 90% for a single fiscal year ending after August 14, 2008, will be placed on provisional certification and may be subject to other enforcement measures. The 90/10 rule calculations are performed for each OPEID unit. The largest OPEID reporting unit in Kaplan’s Higher Education division in terms of revenue is Kaplan University, which accounted for approximately 67% of the Title IV funds received by the division in 2010. In 2010, Kaplan University derived less than 88.7% of its receipts from the Title IV programs, and other OPEID units derived between 68.3% and 87.1% of their receipts from Title IV programs. In 2009, Kaplan University derived less than 87.5% of its receipts from Title IV programs, and other OPEID units derived between 68.0% and 87.2% of their receipts from Title IV programs."

Can you please point me to the 11 schools in excess of 90%? I would like to see what percentage of the company's revenue could be impacted if these schools lost their federal funding.

Thanks.
tonyg34
Tonyg34 - 3 years ago
@FetchXL

major mea culpa, and I'd like to apologize. This is what happens when you treat google search as fact without reading the source material.

The info I posted to you was my lazy misinterpretation of a pr statement from the GOA regarding the effect of possible changes to the current 90/10 test. IF those changes were enacted then 11 schools would not pass. All Kaplan schools pass the current standards.

There are 11 Kaplan schools - 9 under the Kaplan brand and 2 under the TESST college of tech brand that are above 85% and considered "at risk". The "at risk" label is applied to schools who would or could fail based on recommendations made by US Sec of Edu Arne Duncan. Those recs include moving payments made under the GI bill from the 10% column to the 90% column. The other big footnote is that under current rule, the 10% column includes the present value of outstanding loans but the 90% column only counts actual payments received. So if you counted outstanding value of loans in both columns, or conversely only counted actual payments received in each column, then 90/10 revenue percentage would likely increase.

One other weird thing I just learned, if you get a grant or fee waiver from the school itself, that dollar amount is added to the 10% column ("including payments for loans made by schools"). So in theory if a school was in danger of going over the limit it could issue "scholarships" to every enrolled student and force itself back into compliance (?).

In the long run, the gov't will probably have to defend the for profit sector and only wants to make a token gesture of reform. I'm a for-profit bull based on demographics alone and someone who did way more homework than me wrote a really great post here on GuruFocus re: exactly this subject

http://www.gurufocus.com/news/139334/attack-on-the-forprofit-education-industry-apol-apei-coco-stra-esi-bpi#139380

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