I BUSINESS & HISTORY
I’ll skip the first century or so of company history. In 1991, Donald Graham took over as CEO of the Washington Post after having been its publisher for a decade. Graham spent the next twenty years building a cable company and an education division to offset the decline in the newspaper business.
1997: Cable ONE founded
2000: The acquisition of Quest Education Corporation with 30 for profit schools brings Kaplan (and the Washington Post) into the higher education industry.
With the help of Warren Buffett who chaired the executive committee for more than 35 years, Don Graham succeeded in growing the two new divisions at a rate that outpaced the decline of the Newspaper. Revenue per share quadrupled.
2012, we are left with:
1) Cable ONE (Cable TV and ISP)
2) Post-Newsweek broadcasting (TV stations)
3) Newspaper (the Washington Post)
4) Kaplan (Education)
Shares trade on the NYSE at $ 390. There are 7.6 million shares outstanding for a market cap of $ 3 billion.
The company owns some Berkshire stock worth $ 300 million and has $ 390 million in cash. The company also has a pension fund that’s worth $ 600 million more than the estimated pension liabilities. I'll be writing about that when we come to the newspaper division.
The company does not consolidate a 49% interest in Bowater Mersey Paper Company and a 16.5% stake in Classified Ventures, LLC (Cars.com, Apartments.com, and HomeGain.com).
On the liabilities side, we find $ 450 million of deb. $ 400 million of that comes due in 2019.
In short, the company has a bulletproof balance sheet and an enterprise value of about $ 2.7 billion.
I’ll estimate the fair value of each of the four divisions and add it all up at the end.
Cable ONE provides cable service to approximately 0.6 million homes, representing about 44% of the 1.4 million homes passed by the systems. In addition to basic video, Cable ONE has 260k digital video subscriptions, 450k high-speed data subscriptions and 180k VoIP (digital voice) subscriptions. Cable ONE operates in 19 states, including Arizona, Tennessee, Texas and Washington. In short, about 450k subscribers (75%) also use their cable connection for Internet and/or phone calls.
Cable ONE also owns unused WiMAX spectrum in the areas it serves.
I belive Cable ONE would attract multiple bidders at $ 3300 per sub. At that price, an acquisition would be immediately accretive to the per-share earnings of any of the comps. $ 2 billion is conservative:
We use $ 3300 per subscriber Cable ONE has a high (and growing !) percentage of HSD subs
We ignore the value of the unused WiMAX spectrum.
Cable One serves 45% of homes passed and has room to grow organically.
Cable ONE offers 50Mbit data connections. The infrastructure is best in class.
The comps are generally levered to the hilt. Cable ONE is not.
Cablevision recently paid $ 4500 per subscriber for Optimum West.
NPG cable was sold to Charter for $ 4100 per subscriber.
TWC just bought Insight communications for $ 3B. Insight serves 700k homes.
I have seen estimates of intrinsic value based on operating income. Operating income understates earnings power because Cable ONE hasn’t raised prices in years. The standard deal is $75 (first year) for TV, 50 Mbit and VoIP. The price thereafter is $ 105. In the US, the average price of triple play is $ 150.
The Post-Newsweek division owns television stations in Houston, San Antonio, Detroit, Miami, Jacksonville and Orlando. Publicly traded comps are Nexstar (NASDAQ:NXST), LIN media (TVL) and Gray television (NYSE:GTN).
$ 850 million is conservative because:
Compared to the others, the company reaches 7.5% of the American population with just six physical stations. Costs should be lower (margins higher). The others need many more stations to reach as many people.
Three of the six stations (KSAT in San Antonio, WPLG in Miami and WJXT in Jacksonville) are ranked number one their area. That’s not the average ranking of the comps.
In 2011 there were no elections and/or summer games. $ 850m is 8x depressed 2011 income.
The Washington Post is a newspaper.
At $ 1000 per subscriber, the newspaper would attract multiple bidders. $ 700m is conservative because:
Unlike the comps, the Post doesn’t charge (yet) for its online content.
The Washington Post has an overfunded pension plan while the comps do not. Adjusting for pension liabilities, the value per sub would be at least 30% higher.
The Washington Post is a brand with global value.
Kaplan, Inc., a subsidiary of the Company, provides an extensive range of education and related services worldwide for students and professionals.
$ 2.5 billion is conservative because:
Kaplan is much less dependent on federal funding than the comps. There are significant professional and international operations.
$ 2.5 billion is roughly 1x revenue. The others trade above that.
In the US, as tuition fees rise, more students will need federal loans to pay for their studies. Kaplan is one of a small minority of schools that are eligible for title IV funding. All the for-profits are. It's easy to forget that they currently serve a small (10%) part of higher education students. The majority (> 85%) of not-for-profit schools aren't eligible for title-IV funding. Their students can't apply for federal loans.
The not-for-profits rely on state funding and serve 85% of the higher education students. If states cut their budgets some more, tuition fees go up. If just 10% of the students now attending state-funded institutions switch to schools that are eligible for title-IV.... that's a potential 2 million US HE students for Kaplan. They now have 85k.
Adding it up and checking for sanity.
I have conservatively estimated the liquidation value of each division. Adding it up gets us a conglomerate worth $ 6.05 billion. With 7.6 million shares outstanding we get a value of $ 800 per share.
Since January 2010, the company has spent $ 800 million buying back stock and paying dividends. At the current enterprise value of $2.7 billion, we have a yield of 15%.
The IRS ignores GAAP and uses their own estimate of owner earnings to tax a company. In 2011, the company reserved about $ 100 million for income taxes. The average effective tax rate for a fortune 500 company is roughly 20%. This implies the IRS has its own estimate of owner earnings of $ 500 million. At the current enterprise value, WPO is trading at less than 6x IRS earnings.
I believe Cable ONE has significant untapped pricing power. The earnings of the Newspaper and the TV stations were depressed in 2011. An estimate of value based on some multiple of recent earnings will underestimate fair value of the company.
No, the Washington Post company (WPO) is not as cheap as you think. It’s much cheaper.
The CEO is paid about $ 500 thousand per annum. He owns 3 million shares (A shares and B shares) worth $1.2 billion. Don Graham has 2500 times his annual salary tied up in the business. His interests are clearly aligned with the interests of minority shareholders.
With the A shares comes a right to pick 70% of the board members. On that board, you'll find:
Barry Diller (member of the board of Coca-Cola and chairman of Expedia)
Chris Davis (guru)
Ron Olson (Berkshire boardmember)
Tom Gayner (guru)
Anne Mulcahy (former CEO of Xerox)
Lee Bollinger (President of Columbia University and chair of the Federal Reserve Bank of New York)
It's a board fitting for Proctor & Gamble, General Electric and Exxon. It's not a board you would expect to find at $ 3 billion mid-cap. If anything, minority shareholders should be thankful to the family for using their superior voting power to form a board of impeccable quality.
In january, the compensation committee set the fair value price at $1,165 per share. No cheap options at this company.
The company is retiring shares at a rate of $ 400 million per annum. Donald Graham owns 3 million shares and Berkshire Hathaway owns 1.7 million shares. This leaves 2.9 million shares costing $ 1.2 billion. Should the next three years resemble the last, by 2015, it will be Donald Graham, Ron Olson and myself on the board. The annual fee I get for sitting on the board will be more than the cost of my shares. A decent return.
Summer games and elections have a positive effect on advertising revenue at the TV stations and the Newspaper.
Less unemployment will have a positive effect on the default rates of tittle IV loans.
VI SPECIFIC RISK
The Graham family has control. In this case, control means they get to choose 70% of the board. I think it’s fair to say it's is a decent board.
Legislation. The TV stations and the Cable company depend on local licenses. The way these licenses are awarded may change. That could damage the franchise.
Legislation. Federal funding of higher education (title IV loans) is subject to new, stricter rules. The for-profit schools enroll students that need loans to pay for tuition. These new rules are not a risk. They're a fact. The company has adjusted. Interestingly, 90% of the not-for-profits aren't eligible for title IV funding. Their students won't be able to get federal loans to pay for tuition because their school isn't eligible. Why don't the not-for-profits apply ?
Market risk. Bears argue the breakup value of the company is irrelevant unless the divisions are actually sold. I believe this is irrational. You don’t need to sell your car to know its value.
Market risk. Conglomerates trade at a discount. Investors will tell you diversification reduces risk. For some reason, they'll pay a premium for pure play stocks.
VII WHY IS THIS CHEAP ?
Index funds and analysts avoid the Washington Post. It’s not a pure play on anything.
The CEO has been selling shares. This is simply not true. Donald Graham hasn't sold a share in his life. Family members have. The shares are held in his name.
For good reason, investors dislike newspapers and avoid for-profit education. The TV stations and cable division are ignored.
Transcript of Shareholder day with Tom Russo asking questions and the presentations for each division.
As usual, Ben Comston did a good job analysing WPO.
Donald Graham has some interesting remarks about near-term results.
Buffett and the Post.
This is not a recommendation to buy or sell anything. I own shares of the Washington Post company. I have no position in any of the other companies mentioned. Any and all questions welcome as usual.