Graham Holdings has a “mishmash of assets”. Why his action is a buy.


The Graham family has been linked to Warren Buffett for more than four decades.


Graham Holdings
,

the family conglomerate, equates to a small-scale version of Buffett


Berkshire Hathaway
,

with a large group of independent companies and a solid balance sheet.

Graham Holdings (ticker: GHC) was known as the Washington Post Co. until it sold the flagship newspaper to Jeff Bezos for $ 250 million in 2013. Despite his significant legacy, Graham is little followed by Wall Street.

“You are no more low-key than Graham Holdings,” says Craig Huber of Huber Research Partners, one of the few analysts to follow the stock, citing the company’s lack of quarterly conference calls and limited efforts at investor relations.

This is a missed opportunity, as thinly traded stocks, at around $ 590, look cheap compared to the estimated value of the company’s assets. They include valuable local television stations, the Kaplan education company, manufacturing and healthcare operations, several car dealerships and restaurants in the Washington, DC area such as the historic Old Ebbitt Grill, which was the capital’s most profitable restaurant before the pandemic.

“What Graham is trying to do is recreate a little Berkshire Hathaway and leave the leadership teams in place to run the businesses,” Huber said. “Investors are frustrated because they don’t understand how it all fits together. The analyst is overweighted and has a target price of $ 730 on the stock.

Business Total value (Mil) Value per share
Kaplan $ 1,600 323
TV channels 1,500 303
Health care 500 101
Manufacturing 500 101
Other companies 700 141
General business expenses -650 -131
Equities, Net cash, Other assets * 400 81
Pension surplus (adjusted for taxes) 1,100 222
TOTAL $ 5,650 $ 1,141
RECENT PRICE $ 587.52

* Shareholdings adjusted for tax.

Source: Barron estimate

Graham is trading well below its book value of about $ 800 per share. Barron wrote favorably about the company in July 2020, when it traded around $ 360 per share. Shares have risen around 10% this year, but have been unchanged since spring 2017.

On a sum of its parts, Graham could be worth more than $ 1,100 per share according to an analysis we carried out with the help of an institutional holder.

A spin-off of its local television channels would go a long way in unlocking value. With lucrative network affiliates in Houston; Orlando, Florida and Detroit, this business could be worth $ 1.5 billion or more, or about half of the company’s current market value.

And there is a precedent: Graham dumped its cable TV business in 2015 to holders like


Cable A

(CABO), whose stock has more than quadrupled since.

“Graham is trading about half of my conservative estimate of NAV [net asset value], which is about as inexpensive as I can remember during my decade of following the business, ”says Eli Samaha, Managing Partner at Madison Avenue Partners, Holder of Graham. “It’s a surprising discount for such a well-run, shareholder-focused company. I expect earnings per share to be significantly higher in a few years as the losses at Kaplan and other companies dissipate and the number of shares declines through buybacks. “

The stock is trading for a modest 12 times expected earnings. Graham’s profits are expected to increase 33% in 2022, to $ 48.25 a share, thanks to an increase in political advertising on television stations and a decrease in losses in some of Kaplan’s international operations.

The company was run from 1991 to 2015 by CEO Don Graham, whose mother, Katharine Graham, held various executive positions in the post for decades before his death in 2001. The company remains a family business. Current CEO Tim O’Shaughnessy, 40, is the husband of Don Graham’s daughter Laura.

Graham Holdings has an excellent balance sheet, with $ 400 million in cash and net investments, and a heavily over-funded pension plan with a surplus of over $ 2 billion. Given federal rules, it’s not easy to monetize a pension surplus without hefty penalties, but the company continues to explore ways to do it.

The over-capitalized pension plan mirrors Buffett’s advice to Katharine Graham decades ago that the Post should weigh its assets heavily on equities. The bulk of the assets have long been managed by Ruane, Cunniff & Goldfarb and First Manhattan, both of whom have ties to Buffett, 91. First Manhattan founder David “Sandy” Gottesman, 95, sits on the board of directors of Berkshire Hathaway (BRK.A).

Kaplan includes an American test preparation company; Purdue Global Online University, in partnership with Purdue University; and international operations, including English as a Second Language programs.

So why is the stock trading so cheap? Graham doesn’t talk much with Wall Street, and he has little analyst coverage. (His CEO was not available to speak with that of Barron.) The family controls the business through non-public voting action, making a takeover or activist involvement unlikely.

“We believe there is a substantial delta between our stock price and our view of intrinsic value,” CEO O’Shaughnessy said in a presentation for Graham Holdings’ annual investor day in early December. “If this gap persists,” he added, “we will likely continue to be a buyer” of the title.

The company slowed down its share buybacks in 2021, however, buying $ 22 million worth of shares in the first nine months of the year, up from $ 123 million for the corresponding period of 2020. Graham Holdings continues to add to its range of activities, pay $ 323 million for Leaf Group, a consumer Internet company, in June. Recently he bought a Virginia Ford dealership for an undisclosed price.

With stock trading at such a low price, buybacks should arguably be a higher priority than adding companies to an already complex mix. A larger dividend would also help – the current yield is only 1%.

In a November memo, Huber wrote that Graham Holdings is valued at less than four times its annual earnings before interest, taxes, depreciation and amortization, or Ebitda, using an average of 2022 and 2023 Ebitda, about a third of the multiple of Marlet. He uses an average of 2022/2023 because the company’s TV business tends to do better in major election years, like 2022, due to political advertising.

“These various valuation metrics are too attractive to ignore, and we believe the downside risk is minimal,” Huber wrote. Its price target of $ 730 on the stock reflects a 20% conglomerate discount applied to a “mishmash of assets that admittedly don’t make much sense for us to be together.”

In a highly valued market, Graham Holdings is a low-cost, asset-rich company with a potential catalyst in the spin-off of its television business.

Write to Andrew Bary at [email protected]


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