In a recent edition of Barron’s, Andrew Bary analyzed The Washington Post (WPO) piece by piece and comes to the conclusion that it may be the most undervalued media company in America. Bary explains that when you compare the valuation of all of WPO’s business lines to similar public companies, WPO comes out looking “dirt cheap”. The Washington Post owns Kaplan educational services and receives half of its revenue and profits from that division. The Graham family, which has a controlling interest in the company, has made it clear that they are not in favor of a spinout of the Kaplan products. In light of Barron’s detailed yet straightforward analysis (read it here), The Washington Post’s stock rose by about 10% the day after the article was digested by the market, yet it has done virtually nothing in the week since. We agree that there is significant value in this stock that has yet to be fully recognized by the market.
At Ockham, we have believed WPO has been Undervalued for the better part of two years based on the strengthening fundamentals. Reported earnings took a major hit in fiscal 2009 due in part to one-time charges, but earnings per share should more than double this year. Media companies have been crippled during the recession due to declining newspaper circulation and lower advertising rates across media platforms. However, media stocks have rebounded significantly in this bull market, and Kaplan gives WPO a diversification that other competitors cannot match. As we all know, educational services have been in high demand with unemployment at multi-decade highs. Despite the disappointing bottom-line number for the last two years, the company still managed to grow sales last year by about 2.3% and brought in a much healthier $653 million in cash from operations. Growth is accelerating now that the media side of the business is improving, and when they report first quarter results expectations are for WPO to show 12% sales growth for the quarter.
If you look at what the market has historically been willing to pay for WPO, it is clear that the stock has unjustly fallen out of favor with the market. For example, over the past ten years the market has traditionally awarded WPO with a price-to-cash earnings range of 12.8x to 19.2x, but it currently stands at just under 11x. Similarly, price-to-sales per share currently stands at .95x, which is well below The Washington Post’s historically normal range of 1.64x to 2.32x. Based on this historical data and given the current fundamentals, for WPO to reach just the low end of these valuation ranges would imply a price of about $640 per share or 31% higher than the current price. To be clear, this is not a price target but rather more akin to a margin of safety calculation.
Clearly, we are comfortable in reaffirming our Undervalued rating on WPO despite the quick price appreciation early last week. Value investors are always on the lookout for stocks that are unloved by the market, and WPO seems to be underappreciated despite solid and strengthening fundamentals. However, with the recent attention WPO is getting from the financial media, interest may start building quickly especially as Kaplan gets more credit for its contribution.