The year was 1998 and my first job out of college was at the Omaha World-Herald Company, publisher of the largest newspaper in Nebraska. The company was employee-owned and their approach was to re-invest the massive amounts of cash generated by the newspapers into other assets. It was actually a pretty neat structure developed by the former owner, Peter Kiewit, to make sure his home town newspaper would never be sold to an outsider following his death. The bylaws required employees to give up any proceeds over book value if the company was sold.
Those old printers may well have been printing cash because the amount of capital that needed to be re-invested was significant. A lot of this cash was re-invested into other media companies, mostly direct marketing and community newspapers. We made a few investments outside of these markets including the largest provider of election systems in the world.
Fast forward to 2011, and the newspaper business is almost unrecognizable. Thanks to the Internet and Craigslist the sacred cash cow of the newspapers, classified advertising, has been sent out for slaughter. Fortunately for shareholders of the Washington Post (WPO), the company’s board (including the Graham Family and Warren Buffett) reinvested the company’s cash into non-newspaper assets including cable television, television broadcasting and education. The result is a company named after its flagship newspaper that generates less than 15% of its revenue and none of its profits from newspapers (thanks, Craigslist).
The move into non-newspaper businesses was good to shareholders, hitting a record high share price of almost $1,000 in 2005. The stock is trading in the $330′s this week and it looks like a steal to me. Why? Because Mr. Market is so down on the for-profit education business that he’s giving it away for free if you buy the cable and broadcast television businesses.
Here’s the math:
Cable Television Business
3-year average EBITDA: $288.8 million
Industry average multiple: 6.0x
Fair market value: $1.7 billion
Broadcast Television Business
3-year average EBITDA: $116.6 million
Industry average multiple: 6.0x
Fair market value: $0.7 billion
The total fair market value of these two segments is $2.4 billion. The company has $260 million of cash in excess of its interest-bearing debt which results in an enterprise value of $2.7 billion. The most recent 10-Q gives us 7,933,000 million shares outstanding on a diluted basis which results in a market value of $2.7 billion using a share price of $340.
Mr. Market has priced his shares in Washington Post at almost the exact value of these two businesses. Here’s what he is giving us for free.
3-year average EBITDA: $339.6 million
Industry average multiple: 4.0x
Fair market value: $1.4 billion
If you add these three businesses together along with the net cash, the company is worth $3.8 billion, or $512 per share.
Mr. Market is also throwing in the largest newspaper in one of the most influential cities in the world. Since the newspaper business is operating at break-even I can’t assign any value to it. Think of it like the lottery ticket your mom gives you with your birthday presents; it’s probably worth nothing, but there’s a small chance it’s worth something.
This break-up approach ignores the negative EBITDA from the company’s other businesses and its corporate office. The corporate office expense would likely be reduced if the company closed the education business which represented 61% of the 2010 revenue.
On a cash flow basis my discounted cash flow model is coming up with a value of $565 per share based the company’s historical performance. Some of this value will depend on the impact of the federal financial aid reform targeted at for-profit education. This is not a small issue, but I think it’s a good risk-reward trade off since I’m paying nothing for the education business.
Reforms are likely to impact some of the for-profit education companies since they will look at student loan default rates and gainful employment post-graduation to determine a school’s eligibility for federal financial aid. In my opinion, it’s more likely to impact degree mills and schools like the Art Institutes more than the company’s schools which focus on healthcare, IT and legal. The ROI of a degree in these industries still makes financial sense and I don’t see that changing much in the future.
I really like the stability of the cable TV business and to a lesser extent, the broadcast TV business. Wireless data networks and Hulu are long-term threats, but at 6x EBITDA, those threats are priced into the valuation in my opinion.
My first boss at the Omaha World-Herald Company always told me to have an opinion. My opinion is that I would not sell Mr. Market my shares of Washington Post for less than $500 today.
Disclosure: I am long WPO.
Additional disclosure: Kaplan Schweser, a division of the Washington Post, is an advertiser on AnalystForum, a company I own.