Newspapers these days are a tough business. The publically traded ones have significantly cut their dividends, with Gannett being only the most recent. The less fortunate (read—those highly levered) have entered bankruptcy, to be chopped into pieces sized for the auction block. Nor has the Washington Post Company been immune to the challenges of this recession, having seen a significant decline in advertising revenue in recent quarters (with print ad revenue down 21% at the Post and 22% at Newsweek ).
As most are aware, the print newspaper business is in serial decline. As Warren Buffett has noted, “when they take people to the cemetery, they’re taking newspaper readers, but when people graduate from high school, we’re not gaining newspaper readers.”
The Washington Post Company however is much more than a newspaper business. In fact, in our lights, less than a quarter of its intrinsic value lies in its newspapers and magazines. Contrary to appearances, the Washington Post Company is an education business. And the numbers bear this out. In 2008, 52% of its consolidated revenues derived from its wholly-owned subsidiary Kaplan, which operates in three business segments: for-profit higher education, test preparation services, and corporate training. In addition to Kaplan, WPO’s assets include: Cable ONE, a cable service with nearly 700,000 subscribers across 19 states; its namesake newspaper and affiliated publications, which include their website and related investments (e.g., Slate.com, The Root, The Big Money); a 16.5% stake in online classified ad provider Classified Ventures LLC; Newsweek and its thirty affiliated publications; The Daily Herald, which publishes The Herald in Everett, WA as well as other affiliated publications; six VHF television stations located in Houston, Detroit, Miami, Orlando, San Antonio, and Jacksonville; a 49% stake in Bowater Mersey Paper Company; and $333.3 million in marketable equity securities (as of 12/31/08), which includes $218.8 million of shares in Berkshire Hathaway. Whew.
To give a detailed intrinsic value that accounts for all these parts would require more work than we’re prepared to offer today. But let’s just focus on Kaplan. Kaplan generated 206.3 million in operating income in 2008, with 67.3 million in depreciation, and 15.5 million in amortization. After subtracting 99.3 million for capital expenditures, Kaplan had free cash flow of 189.8 million. In 2007, Kaplan posted free cash flow of 127.7 million; in 2006, 112.7 million. For now, let’s ignore Kaplan’s growth rate and the counter-cyclical character of the education business (McKinsey’s research shows a 90% increase in education spending during the past two recessions).
Looking at Morningstar’s numbers, we see that competitor DeVry currently trades at 18x FCF. Capella Education at 21x FCF. Career Education at 12x. Corinthian Colleges at 48x. ITT at 6x. Strayer at 28x. If we throw out the high and the low, we get a sector average of 19.75x FCF. Applied to Kaplan’s 189.8 million FCF, we get a value of 3.75 billion. As of 2/26/09’s close, the whole Washington Post Company traded for less than 3.5 billion.
Now, we recognize that to some, a 19.75 multiple on FCF may seem high. So tomorrow, we’ll take a closer look at the rest of the Post’s assets and give a more comprehensive estimate of its fair value.
Disclosure: I, or persons whose accounts I manage, own shares of Berkshire Hathaway at the time of this writing.