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Graham Holdings: Notes On The Annual Meeting And Pandemic Impacts

May 08, 2020 11:11 AM ETGraham Holdings Company (GHC)6 Comments
Ohio Capital Ideas profile picture
Ohio Capital Ideas


  • Graham Holdings Q1 earnings and annual shareholders meeting shed important light on how the company has been impacted by the COVID-19 pandemic.
  • While intrinsic value has certainly declined, full year operating cash flow is expected to be meaningfully positive for 2020.
  • Further, current cash on hand is more than sufficient to cover all near term debt with long term debt not maturing until 2026.
  • A conservative valuation still suggests that shares are attractive at $346 per share and even those demanding a greater margin of safety should keep an eye on shares for a potential bargain later in the year.

It was only two months ago that I last wrote about Graham Holdings Company (NYSE:GHC), but it feels like it may have been two years ago. On March 9th I modeled the company's worth at ~$680 per share using what I felt were conservative assumptions.

While the number of confirmed COVID-19 cases at the time was still low, the risk of large scale disruption was there and clearly not enough effort was made to analyze this risk and incorporate it into the modeled valuation.

Graham Holdings' LogoCompany logo. Source: Company.

First quarter earnings have also been released since I last wrote and the company also held its annual meeting on May 7th. Both provide important insight into specific COVID-19 impacts to the company's operating businesses and how the company's capital structure is being managed in response. I also posed three questions to CEO Tim O'Shaughnessy during the company's annual meeting. His answers were thoughtful and shed some light on how to think about the valuation of the company.

If forced to place a specific value on shares today it would be roughly $520 per share, a decline in intrinsic value from two months ago that is close to proportional to the share price decline. But, all of the company's businesses have been and continue to be impacted by COVID-19, and investors should consider that the range of possible outcomes for Graham Holdings and the economy continues to be wider than normal. As such, a larger than normal margin of safety may be demanded for the stock by many investors.

First Quarter Earnings and Initial COVID-19 Impacts

First quarter earnings were affected by the COVID-19 pandemic, but obviously not nearly to the extent that Q2 and Q3 earnings will be. It appears that prior to the disruption many subsidiaries were on a path towards a

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Ohio Capital Ideas profile picture
"Two types of choices seem to me to have been crucial in tipping the outcomes towards success or failure: long-term planning and willingness to reconsider core values. On reflection we can also recognize the crucial role of these same two choices for the outcomes of our individual lives.”-Jared DiamondOhio Capital Ideas is a private investor, investment analyst, and writer from Ohio. My interest in investing was first sparked by watching the tech bubble of the late 1990s and the attitude of the time that successful investing was easy. Experience has shown that investing is far from easy. Since then, I have spent a significant amount of time growing my knowledge of successful investing, reading about other successful investors, and managing my own family’s investments. The process of writing, as well as respectfully debating points of view through comments and messages with others, is a great aid to the investment process.The name “Ohio Capital Ideas” comes from the book Capital Ideas by Peter Bernstein. For a period of time I wrote under the name “Capital Ideas”, but added the “Ohio” to distinguish between other commentators and newsletters using the generic term “Capital Ideas” and avoid any possibility of confusion.Ohio Capital Ideas is not a registered investment advisor, legal or tax advisor, or a broker / dealer. All opinions expressed are from personal research and intended to be educational. You should consider your own personal situation and seek tailored professional advice if needed before making any investing or financial decisions for yourself.

Analyst’s Disclosure: I am/we are long GHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (6)

Arcturus Falling profile picture
Thanks for the informative article. You may have mentioned this and I missed it, but what percentage of GHC's revenue/profit/value derives from Kaplan?

I've read (anecdotally but verifiably) of some universities considering moving away from standard tests as part of admissions due to COVID-related issues this year. And, while it isn't certain or even necessarily likely, there may be some momentum towards moving away from them in general, which might hurt Kaplan's business not only short-term but long-term.

But thanks again for bringing this to my attention. I'll probably look into it further.
Ohio Capital Ideas profile picture
About half of revenue is from Kaplan, but in the valuation I did a couple months back, I only attributed a quarter of the value of the operating companies to Kaplan.

Test prep has struggled for a long time, mostly because the company wasn't aggressive enough in moving away from physical locations to virtual programs. I have no doubt that the business will be rocked this year, but I'm not sure longer term universities will move decisively away from tests like the LSAT (more possible to happen for things like the GRE) or other competitive admissions programs such as MCAT and GMAT. A lot of Kaplan's value now is in the international and professional businesses, which again, are going to be decimated this year, but return to normal in the future so long as the CFA exam continues attracting applicants and students are willing to travel for English language universities and to study languages.

Thanks for your comment.
Arcturus Falling profile picture
Very informative, again. Thanks!
Briar profile picture
Good analysis, Ben!
A comment on the overfunding of the pension plans. In the mid ‘70s, when Warren and Kay were still getting to know each other, Warren wrote her a several-page letter suggesting that she view the funds as a separate line of business, and invest accordingly. She did, and the result was overfunding. The Washington Post was sold to Bezos for around $250 mil., while the Boston Post, with an underfunded pension plan, was sold, by the NYTimes, to Henry for a mere $50 mil. While the Washington Post Company was not allowed to withdraw the overfunding, through a sale of the Post, it was able to capture some of the excess.
Ohio Capital Ideas profile picture
Thanks, Briar. I always appreciate reading your comments.

Graham Holdings seems to me to be very underappreciated. After the sale of the Post and spinoff of Cable One, a lot of people just stopped following it.

I've been impressed by Tim O'Shaughnessy so far. And he's still very young.
Briar profile picture
I’m afraid I fell into that group of under appreciators: we had owned WPO for years, but I sold after the sale of the Post. Call it house cleaning.
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