The Graham family has had ties to Warren Buffett for more than four decades.
Graham Holdings, the family’s conglomerate, amounts to a small-scale version of Buffett’s
Berkshire Hathaway, with a large group of unrelated businesses and a strong 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 its prominent heritage, Graham is little-followed by Wall Street.
“You don’t get more low-profile than Graham Holdings,” says Craig Huber of Huber Research Partners, one of the few analysts following the stock, citing the company’s lack of quarterly conference calls and limited investor-relations efforts.
That’s a missed opportunity, because the thinly traded stock, at around $590, looks cheap relative to the estimated value of the company’s assets. They include valuable local TV stations, the Kaplan education business, manufacturing and healthcare operations, several auto dealerships, and restaurants in the Washington, D.C., area such as the historic Old Ebbitt Grill, which was the highest-grossing eatery in the capital before the pandemic.
“What Graham is trying to do is recreate a small Berkshire Hathaway and leave the management teams in place to run the businesses,” Huber says. “Investors get frustrated because they don’t understand how it all fits together.” The analyst has an Overweight rating and a $730 price target on the stock.
|Business||Total Value (Mil)||Value Per Share|
|Stocks, Net Cash, Other Assets*||400||81|
|Pension surplus (Tax-adjusted)||1,100||222|
*Equity holdings adjusted for taxes.
Source: Barron’s estimate
Graham trades well below its book value of about $800 a share. Barron’s wrote favorably about the company in July 2020, when it traded around $360 a share. The shares are up about 10% this year, but are unchanged since the spring of 2017.
On a sum of its parts, Graham could be worth over $1,100 a share based on an analysis we made with help from an institutional holder.
A spinoff of its local TV stations would go a long way toward unlocking value. With lucrative network affiliates in Houston; Orlando, Fla., and Detroit, that business could be worth $1.5 billion or more, roughly half the company’s current market value.
And there is a precedent: Graham jettisoned its cable TV operations in 2015 to holders as
Cable One (CABO), whose stock has more than quadrupled since then.
“Graham trades for around half of my conservative estimate of NAV [net asset value], which is about as cheap as I can recall in my decade of following the company,” says Eli Samaha, a managing partner at Madison Avenue Partners, a Graham holder. “This is a surprising discount for such a well-managed and shareholder-oriented business. I expect earnings per share to be considerably higher in a few years, as losses at Kaplan and other businesses dissipate and the share count shrinks through repurchases.”
The stock trades for a modest 12 times forward earnings. Graham’s earnings are expected to rise 33% in 2022, to $48.25 a share, helped by increased political advertising at the TV stations and lower losses at some of Kaplan’s international businesses.
The company was run from 1991 to 2015 by CEO Don Graham, whose mother, Katharine Graham, held various executive roles at the Post for decades before her death in 2001. The company remains a family affair. 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 of net cash and investments, and a heavily overfunded pension plan with a surplus of more than $2 billion. It isn’t easy to monetize a pension surplus without big penalties, given federal rules, but the company continues to explore ways to do so.
The overfunded pension plan reflects advice from Buffett to Katharine Graham decades ago that the Post should weight its assets heavily toward stocks. The bulk of the assets have long been run by Ruane, Cunniff & Goldfarb and First Manhattan, which both have had ties to the 91-year-old Buffett. First Manhattan’s founder, David “Sandy” Gottesman, 95, sits on the board of Berkshire Hathaway (BRK.A).
Kaplan includes a U.S. test-prep business; online university Purdue Global, in partnership with Purdue University; and international operations, including programs teaching English as a second language.
So why does the stock trade so cheaply? Graham doesn’t talk much with Wall Street, and it has little analyst coverage. (Its CEO was unavailable to talk with Barron’s.) The family controls the company through a nonpublic, supervoting stock, making a takeover or activist involvement unlikely.
“We believe there is a substantial delta between our share price and our view of intrinsic value,” CEO O’Shaughnessy said in a presentation for Graham Holdings’ annual investor day in early December. “If that gap persists,” he added, “we are likely to continue to be a buyer” of the stock.
The company, however, slowed its stock repurchases in 2021, buying $22 million of stock in the year’s first nine months, down from $123 million in the corresponding 2020 period. Graham Holdings continues to add to its mix of businesses, paying $323 million for Leaf Group, a consumer internet company, in June. Recently, it bought a Virginia Ford dealership for an undisclosed price.
With the stock trading so cheaply, buybacks should arguably be a bigger priority than adding businesses to an already complex mix. A larger dividend also would help—the current yield is just 1%.
In a November note, 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 the market multiple. He uses a 2022/2023 average because the company’s TV business tends to do better in major election years, such as 2022, because of political advertising.
“These various valuation metrics are too attractive to ignore, and we think there is minimal downside risk in the stock,” Huber wrote. His price target of $730 on the stock reflects a 20% conglomerate discount applied to a “mishmash of assets that admittedly make little sense to us to be together.”
In a richly valued market, Graham Holdings is an inexpensive, asset-rich company with a potential catalyst in the spinoff of its TV business.
Write to Andrew Bary at [email protected]