Graham Holdings Has a ‘Mishmash of Assets.’ Why Its Stock Is a Buy.

Graham Holdings Has a ‘Mishmash of Assets.’ Why Its Stock Is a Buy.


The Graham household has had ties to Warren Buffett for greater than 4 many years.


Graham Holdings
,
the household’s conglomerate, quantities to a small-scale model of Buffett’s


Berkshire Hathaway
,
with a big group of unrelated companies and a powerful stability sheet.

Graham Holdings (ticker: GHC) was referred to as the Washington Submit Co. till it bought the flagship newspaper to Jeff Bezos for $250 million in 2013. Regardless of its outstanding heritage, Graham is little-followed by Wall Avenue.

“You don’t get extra low-profile than Graham Holdings,” says Craig Huber of Huber Analysis Companions, one of many few analysts following the inventory, citing the corporate’s lack of quarterly convention calls and restricted investor-relations efforts.

That’s a missed alternative, as a result of the thinly traded inventory, at round $590, appears to be like low-cost relative to the estimated worth of the corporate’s property. They embody worthwhile native TV stations, the Kaplan training enterprise, manufacturing and healthcare operations, a number of auto dealerships, and eating places within the Washington, D.C., space such because the historic Previous Ebbitt Grill, which was the highest-grossing eatery within the capital earlier than the pandemic.

“What Graham is making an attempt to do is recreate a small Berkshire Hathaway and depart the administration groups in place to run the companies,” Huber says. “Traders get annoyed as a result of they don’t perceive the way it all matches collectively.” The analyst has an Chubby ranking and a $730 value goal on the inventory.

Enterprise Whole Worth (Mil) Worth Per Share
Kaplan $1,600 323
TV stations 1,500 303
Healthcare 500 101
Manufacturing 500 101
Different Companies 700 141
Company Overhead -650 -131
Shares, Web Money, Different Belongings* 400 81
Pension surplus (Tax-adjusted) 1,100 222
TOTAL $5,650 $1,141
RECENT PRICE $587.52

*Fairness holdings adjusted for taxes.

Supply: Barron’s estimate

Graham trades properly beneath its e book worth of about $800 a share. Barron’s wrote favorably in regards to the firm in July 2020, when it traded round $360 a share. The shares are up about 10% this 12 months, however are unchanged for the reason that spring of 2017.

On a sum of its elements, Graham might be price over $1,100 a share primarily based on an evaluation we made with assist from an institutional holder.

A derivative of its native TV stations would go a great distance towards unlocking worth. With profitable community associates in Houston; Orlando, Fla., and Detroit, that enterprise might be price $1.5 billion or extra, roughly half the corporate’s present market worth.

And there’s a precedent: Graham jettisoned its cable TV operations in 2015 to holders as


Cable One

(CABO), whose inventory has greater than quadrupled since then.

“Graham trades for round half of my conservative estimate of NAV [net asset value], which is about as low-cost as I can recall in my decade of following the corporate,” says Eli Samaha, a managing accomplice at Madison Avenue Companions, a Graham holder. “It is a stunning low cost for such a well-managed and shareholder-oriented enterprise. I anticipate earnings per share to be significantly larger in a number of years, as losses at Kaplan and different companies dissipate and the share rely shrinks by way of repurchases.”

The inventory trades for a modest 12 instances ahead earnings. Graham’s earnings are anticipated to rise 33% in 2022, to $48.25 a share, helped by elevated political promoting on the TV stations and decrease losses at a few of Kaplan’s worldwide companies.

The corporate was run from 1991 to 2015 by CEO Don Graham, whose mom, Katharine Graham, held varied government roles on the Submit for many years earlier than her demise in 2001. The corporate stays a household affair. Present CEO Tim O’Shaughnessy, 40, is the husband of Don Graham’s daughter, Laura.

Graham Holdings has a wonderful stability sheet, with $400 million of internet money and investments, and a closely overfunded pension plan with a surplus of greater than $2 billion. It isn’t simple to monetize a pension surplus with out massive penalties, given federal guidelines, however the firm continues to discover methods to take action.

The overfunded pension plan displays recommendation from Buffett to Katharine Graham many years in the past that the Submit ought to weight its property closely towards shares. The majority of the property have lengthy been run by Ruane, Cunniff & Goldfarb and First Manhattan, which each 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 features a U.S. test-prep enterprise; on-line college Purdue World, in partnership with Purdue College; and worldwide operations, together with packages instructing English as a second language.

So why does the inventory commerce so cheaply? Graham doesn’t speak a lot with Wall Avenue, and it has little analyst protection. (Its CEO was unavailable to speak with Barron’s.) The household controls the corporate by way of a nonpublic, supervoting inventory, making a takeover or activist involvement unlikely.

“We consider there’s a substantial delta between our share value and our view of intrinsic worth,” CEO O’Shaughnessy stated in a presentation for Graham Holdings’ annual investor day in early December. “If that hole persists,” he added, “we’re prone to proceed to be a purchaser” of the inventory.

The corporate, nevertheless, slowed its inventory repurchases in 2021, shopping for $22 million of inventory within the 12 months’s first 9 months, down from $123 million within the corresponding 2020 interval. Graham Holdings continues so as to add to its combine of companies, paying $323 million for Leaf Group, a client web firm, in June. Lately, it purchased a Virginia Ford dealership for an undisclosed value.

With the inventory buying and selling so cheaply, buybacks ought to arguably be a much bigger precedence than including companies to an already complicated combine. A bigger dividend additionally would assist—the present yield is simply 1%.

In a November notice, Huber wrote that Graham Holdings is valued at lower than 4 instances its annual earnings earlier than curiosity, taxes, depreciation, and amortization, or Ebitda, utilizing a mean of 2022 and 2023 Ebitda, a few third the market a number of. He makes use of a 2022/2023 common as a result of the corporate’s TV enterprise tends to do higher in main election years, equivalent to 2022, due to political promoting.

“These varied valuation metrics are too engaging to disregard, and we expect there may be minimal draw back danger within the inventory,” Huber wrote. His value goal of $730 on the inventory displays a 20% conglomerate low cost utilized to a “mishmash of property that admittedly make little sense to us to be collectively.”

In a richly valued market, Graham Holdings is a reasonable, asset-rich firm with a possible catalyst within the spinoff of its TV enterprise.

Write to Andrew Bary at andrew.bary@barrons.com



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