Recently, I recommended Washington Post as a good contrarian investment that was considerably undervalued near $300/share. Since that post, the stock has rallied more than 25% to +$380/share. In the interest of full disclosure, I present my full valuation breakdown of Washington Post. My original WaPo valuation was published in Barron's (March 19, 2010 edition- Letters to the Editor). The analysis below updates that work and demonstrates where I come up with my $478/share sum-of-the-parts valuation (+60% upside from entry point).
Washington Post has 4 distinct business units and a significant pile of investments that comprise its value. The business units and my best-guess at valuations are as follows (in order of relevance):
1)Cash and Investments of $1.05 Bln= $660Mln cash + $392Mln stock (mostly Berkshire Hathaway shares). WaPo does have $400Mln Long-term debt, which doesnt mature until 2019.
2) Cable Television Business worth $2.0Bln= 1.4Mln subscribers (across cable, internet, telephony) in rural markets with limited competition. This unit generates EBITDA of $300Mln per annum and is likely worth at least a 7x multiple, based on below-average capital spending needs.
3) For-Profit Education Company Kaplan-worth at least $1Bln in= Annualized EBITDA for 2010 will be $425Mln, which suggests a low valuation multiple of 2.2x pre-tax operating profit. A significant portion of Kaplan's business involves recruiting minorities and unemployed individuals to go back to school and utilize available federal grants. Recently, the Department of Education has decided to crack-down on abuses in the for-profit space. They have proposed very stringent "gainful employment" requirements, which will be certain to shut-out minorities and at-risk unemployed persons from the higher education market. Virtually no college (non-profit or for-profit) will risk losing access to federal funding by "taking a chance" on someone with a high financial risk profile (i.e- low credit score, no job, no savings, medical problems, criminal record, etc.). I do not love the for-profit education business, but the ends do not appear to justify the means.
At a 2.2x multiple, Kaplan is priced to either be out-of-business within 2 years, or be severely distressed. By pricing for the worst-case, it leaves us a free upside catalyst in the event :1) Republicans win Congress and dilute for-profit clampdown 2) Kaplan alters its business model 3) Final regulations are delayed or otherwise watered down. 4) Washington Post steps up lobbying efforts. As Bill Clinton once said, "Never pick a fight with a guy that buys ink by-the-barrel", which is certainly the case given Washington Post controls the namesake newspaper!
4) Broadcast TV stations worth at least $500Mln- This unit is clearly on the decline, but is generating an annualized $110Mln in EBITDA in spite of overall ad-market weakness. Assigning a 5x multiple with a strong political ad-spending season ahead of us seems to make sense.
5) Washington Post newspaper worth at least $250Mln?- This is a total guess. Washington Post is one of several iconic newspapers that likely has staying power, although not as much clout as the NY Times/Wall-Street Journal. The Post is still important and holds some editorial sway in the epicenter of our fast-spending federal government. The Times is set to generate $700Mln revenue this year (-30% YoY), but a distressed valuation of 1/3rd times sales appears appropriate.
Summary- In total, my estimated enterprise value for Washington Post is $4.4Bln or $478 per-share(after subtracting $400Mln debt), with a free-call option on the Kaplan for-profit schools in the event that federal student-loan regulations are not altered. If Kaplan were worth absolutely zero, Washington Post would still be worth $3.4Bln or $370 per share under our analysis.
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