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Graham Holdings Taking Care of the Business

Graham Holdings (GHC), formerly the Washington Post Company, is a diversified media and education company which operates chiefly in two areas of the media business: television broadcasting and cable television.

The company owns Kaplan, a leading global provider of educational services to individuals, schools and businesses, across more than 30 countries, Post-Newsweek Stations in Detroit (NBC), Houston (NBC), Miami (ABC), Orlando (CBS), San Antonio (ABC) and Jacksonville, Cable ONE, digital video, Internet and phone services provider to homes and businesses, the Slate Group, a daily online magazine, Trove, a digital team focused on innovation and experimentation with new technologies, Social Code, leading social marketing solutions partner, Celtic Healthcare, and Forney Corporation. The company has recently sold most of its newspaper operations.

The company works through different segments. The education segment provides products and services, mostly through the company s wholly-owned subsidiary Kaplan, Inc. The cable television segment is operated through Cable One, the company owns cable systems offering basic cable, digital cable, pay television, cable modem, and other services to subscribers. The TV Broadcasting segment includes company’s broadcast operations through Post-Newsweek Stations. Other Businesses segment includes Trove and WaPo Labs, Slate Group, Social Code, Celtic Healthcare, Inc., and Forney Corporation.

Recent Performance

Results for third-quarter 2013were behind expectations, with a 5.6% fall in the bottom-line, but a top-line rise of 3%. The Broadcasting division perceived a strong decline due to lower political advertising revenue and no special events-related advertising. The drop in student enrollment also affected the Education segment. As of October 1, 2013, the company completed the divestment of its newspaper publishing businesses to Amazon.com Inc. (AMZN) founder, Jeffrey P. Bezos, for $250 million. The sell included The Washington Post, Express newspaper, The Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Times, El Tiempo Latino and Greater Washington Publishing. Analysts think this transaction will have positive outcomes for Graham Holdings, given the unclear profitability these papers had presented for some time.

Historically, Kaplan Higher Education has been its largest profit driver, representing 40% of revenue in 2010. But Kaplan has been struggling with structural obstacles regarding the education sector such enrollment declines, affecting margins and revenues, and it is still uncertain that the industry will be soon stabilized. Lately, most profit has been generated by the company's cable and television broadcasting businesses, which operate in relatively mature categories. However, these businesses are subscale and pay higher content fees (in cable) and receive lower retransmission consent fees (in broadcasting) than peers. Still, the combination of the firm's numerous FCC licenses and content partnerships puts this division in an oligopolistic position in most of the company’s local markets.

Growth and Acquisitions

The company has focused on generating a rapid internal growth through acquisition from Kaplan. Acquisitions included education businesses in overseas markets (Canada, Ireland, Australia and China), and have increase profitability while rising revenue 4% in the third quarter of 2013. As of Cable Television segment, revenue rose 1% to $202.4 million for the same period, growth driven by higher rates, increased commercial sales and lower promotional discounts. In addition, the divestment of the newspaper publishing businesses allowed Graham Holdings to clear a troubled area of its business and improve overall performance, being able to focus more on its other core business activities. The purchase of Forney Corporation, a supplier of products and systems for power and industrial boilers, is part of the company’s current intention to diversify its revenue through the creation of venues in order to endure economic uncertainties. In the same line, trying to invest in companies with a solid long term earnings future, Graham Holdings has acquired Celtic Healthcare Inc. a company engaged in home healthcare and hospice services in the northeastern and mid-Atlantic regions.

Final Thoughts

Donald Graham, after serving as publisher of The Washington Post newspaper for 21 years, took over as chairman and CEO in 1991. After the company sold its namesake newspaper operations to Jeff Bezos, the executive team has proven to be strong enough to avoid poor acquisition decisions, typical of conglomerates. Still, the company faces some hard time regarding its education segment. As Kaplan Higher Education relies on federal student financial aid programs, the Title IV funds, for a significant portion of its revenue, any future changes in Title IV fund allocation may reduce access to these funds, affecting profitability. Moreover, competition from other traditional colleges and other for-profit schools is increasing while better funding for community colleges could substantially decrease demand for technical degrees, troubling sternly Graham’s margins.

The company’s other businesses face as well long-term secular headwinds and will have to adjust its structure in order to adapt. Strong rivals amid the television market along with new competition from other forms of video program delivery systems, including DBS services, telephone companies and the Internet could depress the firm’s top and bottom lines performance. Still, through a series of good investments, the firm has more than $1 billion of overfunded pension assets, surplus which could help subsidize future business ventures. Some analysts think that even without any further asset sales or spinoffs, Graham Holdings looks appealing based on its asset value and the turnaround potential at Kaplan.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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