The Washington Post Company (WPO)

ToddMCTC (91.80) Submitted: 1/20/2009 1:38:51 PM : Start Price: $407.97 WPO Score: -34.43

You may giggle a bit when I propose a newspaper as a long but hear me out. The hidden gem within this portfolio of assets is their education division. It is currently more than 50% of revenues at $2,030mm in 2007 and 48% of revenues or $1684mm in 2006 up from $621mm in 2002 with 20mm in Profits. Also in 2002 while we were still recovering from a recession and the effects of 9/11 revenues increased 26%. So in the period of five years this segment has tripled revenues, septupled net income and it is highly resistant to slowdowns in the economy, not too shabby.

Well, what are we paying for this segment among its other parts? On a quarterly basis by revenues, 53% education (Kaplan), 17.5% newspapers (the Washington Post), 16.3% Cable Television (Cable One), 7% Television Broadcasting Various NBC and CBS affililates), and 5.4% Magazines (Newsweek & Foreign Policy - FP). Some of these are premier brands like Washington Post and Newsweek. While the market is currently valuing newspapers and magazines at a significant discount to the group like GCI, NWS, LEE, MNI and MDP and MEG part of this equation has to do with their leverage on an asset with declining revenues. While I do not disagree that the newspaper model is in decline, information is not. There is room going forward for newspapers as information sources, available through content aggregators for a fee. One might see the division of labor split between such properties as the WSJ, the NYT and the Washington Post each for their various specialties. But these legacy assets do tend to come with a cost and here that would be pension obligations and OPEBs. Annual servicing is not oppressive in this case but it is safe to assume that even WPO's conservative assumptions will be a bit long of the mark fo a year or two. Lets suggest that the tv, cable, newspaper and magazine assets should trade with the market (forecasting armageddon) at 6x, 10x, 3x and 5x EPS respectively. Solving for the implied value of the education business, given that the firm is conservatively financed with less than $100mm in net debt, and $500mm in loans, capitalized leases of approx. $500mm and 7x EBIT coverage, you come up with 10.25x ttm EPS. I would suggest that this is FAR too low for the premier business in its space. If you want your kids to have a shot at a top school this suite of services is a must. If you want to advance your career with advanced certifications their courses are a requirement. It is both procyclical and countercyclical . Let us also consider the absurd valuations being place on other education stocks APOL, ESI and STRA - these trade at 27.63x,23.97x and 41.70x ttm EPS respectively. A far saner approach to valuing Kaplan would be in the 17.5x EPS which suggests that WPO is currently 30% undervalued with extremely conservative numbers.

There are scenarios where the value locked up in WPO could be released. A spin-off of the Kaplan assets ala Scripps is possible but not likely. Over time this value is likely to be realized as Mr. Graham and Mr. Buffett reallocate capital from the businesses in decline to this wonderful asset. Free cash flow from the businesses will increase as capex for these business is diverted to the education segment. Sales of assets to ideal homes for these assets will reduce the drag that they impose on overall results. WPO already has significant online assets and is learning to imprve their effectiveness. In short, we are receiving a wonderful asset at a discounted price where the blended performance is set to improve substantially.