More to this Media Company than Meets the Eye
Back in 1973, Warren Buffett began accumulating shares in The Washington Post Co. (NYSE: WPO), which at the time consisted of the prestigious namesake newspaper publication as well as a number of television broadcasting and cable television systems. More than three and a half decades later, and some things never change — just this week the newspaper won four Pulitzer Prizes. And while many of these assets remain, the Post faces a new landscape: a declining print business in the face of new media, namely the Internet. That might be enough to make investors head for the exits (if they already haven’t), but another segment of the company is actually thriving — so much so that it has grown to become the largest division and main driver of improving the company’s fortunes.
The Kaplan education segment represented nearly 58% of last year’s total sales of $4.6 billion and, for all practical purposes, all of total company operating profits of $194 million. The other segments combined to break even. Broken down a bit further, the cable television and television broadcast units offset the losses in publishing, with the newspaper business posting an operating loss of $164 million to make the $29 million loss in magazines seem trivial.
Kaplan specializes in providing online classes and more traditional classroom settings through its 74 physical campuses in 19 states. Degrees span from professional certifications, including nursing and criminal justice to master’s degree programs in business and teaching education. Kaplan also offers test preparation services and operates in parts of Europe and the Asian Pacific.
Kaplan has proven extremely profitable for The Washington Post Co. and is also rapidly growing. Growth is stemming from organic means as the for-profit education industry takes market share from more traditional non-profit universities and also from acquisitions. Kaplan grew +13% last year and boasted an operating margin of 12%.
Cable television is the next largest contributor to sales at 16% and experienced negligible year-over-year sales and profit growth last year. Both publishing units and television broadcasting saw double-digit declines in sales, with the Post posting a marked -23% decline in print advertising and Newsweek seeing a -37% plummet in ad revenue.
A recession courtesy of a global credit crisis is the primary reason for the dismal near-term advertising trends, but weakness in everything except education and cable can also be attributed to a secular decline as advertising shifts to newer media, especially the Internet.
On a more positive note, Kaplan has seen its share of total revenue rise from 34% back in 2005. Additionally, total company operating cash flow continues to improve as capital is siphoned from the shrinking divisions into education.
Washington Post’s stock price has recently run up with the overall market and a favorable mention in investment publication Barron’s, but it still trades at a very reasonable multiple of just 12 times free cash flow. This is well below the market’s multiple of 22 and is the lowest Washington Post has traded in more than a decade. Also, return on invested capital was nearly 14% last year, more than double the market average.
It’s difficult to see the stock trading in excess of 20 times free cash flow as it has in the past, but there is considerable upside given the healthy outlook of for-profit educators. The other wild card is a recovery in advertising, which typically occurs in the later stages of an economic recovery — but it will happen at some point nonetheless.
The longer term outlook for the non-education divisions is murky at best, but management has an impressive, consistent operating history of balancing the company’s multiple business segments. Warren Buffett first started observing the impact that new media was having on his Washington Post and Buffalo News investments in the 1990s, but stuck with the Post given management’s track record of generating excess capital to return to shareholders. He also lucked-out — it was difficult to foresee Kaplan becoming wildly successful. Kaplan is the key reason he and prospective shareholders should continue to do very well in the upcoming years.