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Published: April 19, 2010
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.
-- Ryan Fuhrmann
Contributor
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