Yesterday, we drew up a laundry list of the Washington Post Company’s assets and discerned the free cash flow (FCF) of Kaplan, its wholly held education subsidiary. Relative to the average FCF multiple of its peers (19.75x), one could make the case that Kaplan itself is worth more than the current market cap of WPO (which stood at 3.38 billion today, 2/27/09).
Yet, that 19.75x FCF valuation may look like a steep price, too high to provide the investor with a sufficient margin of safety. Even if the conservative investor grants that the education business is counter-cyclical and has good growth prospects, he may require future earnings to be more visible than Kaplan’s in order to justify that multiple.
Another way to value Kaplan’s intrinsic value is via a discounted cash flow analysis. Looking through the 10-Ks, we see that Kaplan had FCF of 189.8 million in 2008, 127.7 million in 2007, and 112.7 million in 2006. The older 10-Ks do not break out the depreciation and amortization expense for Kaplan alone, so it is difficult to discern Kaplan’s FCF growth rate. If we posit a modest 10% growth rate in FCF for Kaplan’s next decade, and a lower 5% for the next, and then discount those cash flows at 15% and demand a 25% margin of safety, the investor should feel comfortable buying the whole business for 12 times Kaplan’s 2008 FCF plus its equity. What’s Kaplan’s equity value? Given Kaplan’s acquisition streak, the 10-K shows over 2 billion in goodwill for Kaplan alone. The financial statements do not break out shareholder equity for Kaplan, so we’ll estimate it at half of their stated goodwill, or 1 billion. Thus, an investor seeking a 15% return and satisfied with a 25% margin of safety should be willing to pay 3.28 billion for Kaplan (2.28 billion for the cash flows and 1 billion for the equity).
Of course, while Kaplan is arguably WPO’s crown jewel, its other assets have significant value as well. Cable ONE had FCF of nearly 170 million in 2008. The television stations had over 90 million in FCF. The newspaper and print businesses were breakeven on free cash flow or slightly negative. Even after the market sell-off, its pension was overfunded by 320 million (as of Dec. 31) and its future return expectations reasonable (or, in my lights, low).
If we value Kaplan lower than its competitors, at 3.28 billion, put a cheap 8x FCF multiple on the growing cable business, and a 6x FCF multiple on the television stations, we get a value of 5.18 billion. Add in the 333 million in marketable securities and 320 million in the over-funded pension plans, and the value stands at 5.83 billion. And that’s assuming that we get all of their print and online publications for free.
In sum, we expect that an investor seeking a 15% return and 25% margin of safety would pay at least 5.83 billion for the Washington Post Company, or $622 per share. Though it may not be a dollar priced at 20 cents (like when Buffett first bought WPO), it looks to us like a dollar selling for less than 50 cents.
Disclosure: No position in the aforementioned companies at the time of this post.