This Mini Berkshire Hathaway Flies Under the Radar. And Its Stock Is Cheap.

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The Graham family has had a relationship with Warren Buffett for more than four decades. Graham Holdings,
The family group is the equivalent of a smaller scale version of Buffett’s Berkshire Hathaway.,
With a large group of unrelated businesses and a strong balance sheet.

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Graham Holdings (ticker: GHC) was known as the Washington Post Company until it sold the flagship newspaper to Jeff Bezos in 2013 for $250 million. Despite his prominent legacy, Graham is little followed by Wall Street.

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“You don’t get more low-profile than at Graham Holdings,” says Craig Huber of Huber Research Partners, one of the few analysts who follows the stock, citing the company’s lack of quarterly conference calls and limited investor-relations efforts. Giving.

This is a missed opportunity, as the undervalued stock, at around $590, looks cheap relative to the estimated value of the company’s assets. These include valuable local TV stations, Kaplan education businesses, manufacturing and health care operations, several auto dealerships, and restaurants in Washington, D.C., such as the historic Old Abbitt Grill, formerly the highest-grossing eatery in the capital. global pandemic.

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“What Graham’s trying to do is rebuild a smaller Berkshire Hathaway and leave it to the management teams to run the business,” 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.

Graham trades well below its book value, around $800 per share. baron’s Well written about the company in July 2020, when it traded at around $360 per share. Shares are up about 10% this year, but have remained unchanged since the spring of 2017.

Based on an analysis done with the help of an institutional holder, Graham’s price could exceed $1,100 per share.

The spinoff value of its local TV stations will go a long way toward unlocking that. With engaging network associates in Houston; Orlando, Fla., and Detroit, that business could be worth $1.5 billion or more, which is about half the company’s current market value.

And there’s a precedent: Graham spun off its cable TV operations in 2015 to holders as Cable One (CABO), whose stock has more than quadrupled since then.

“Trades for about half of my conservative estimate of Graham’s NAV” [net asset value]”From what I remember in my decade of following the company, that’s as cheap as it gets,” says Eli Samaha, managing partner at Madison Avenue Partners. “This is an astonishing discount for such a well-managed and shareholder-oriented business. I expect earnings per share to be significantly higher in a few years, as losses at Kaplan and other businesses are reduced and through buybacks.” Reduces the number of shares.

The stock trades at a nominal 12 times forward earnings. Graham’s earnings are expected to rise 33% to $48.25 per share in 2022, helped by rising political advertising on TV stations and lower losses in some of Kaplan’s international businesses.

The company was run from 1991 to 2015 by CEO Don Graham, whose mother, Katherine Graham, held various executive roles in 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, net cash and investments of $400 million, and a heavily overfunded pension plan with a surplus of more than $2 billion. Given federal regulations, monetizing pension surpluses without huge penalties isn’t easy, but the company is exploring ways to do so.

The overfunded pension plan reflects Buffett’s advice to Katherine Graham from decades ago that Post should weight his wealth heavily toward stocks. Most of the estate has long been run by Ruen, Kniff & Goldfarb and First Manhattan, both of which belong to 91-year-old Buffett. First Manhattan’s founder, David “Sandy” Gottsman, 95, sits on the board of Berkshire Hathaway (BRK.A).

Kaplan includes the US test-prep business; Online University Purdue Global, in partnership with Purdue University; and International Operations, including programs that teach English as a Second Language.

So why does the stock trade so cheaply? Graham doesn’t talk much with Wall Street, and has very little analyst coverage. (its CEO was not available to speak Why Baron?) the family controls the company through a non-public, supervised stock, reducing the possibility of an acquisition or active participation.

“We believe there is a substantial delta between our share price and our view of intrinsic value,” said CEO O’Shaughnessy. A presentation For Graham Holdings’ annual Investor Day in early December. “If this gap persists,” he said, “we are likely to remain buyers” of the stock.

However, the company slowed its stock repurchases in 2021, buying $22 million of stock in the first nine months of the year, down from $123 million in the same 2020 period. Graham Holdings continues to add to its mix of businesses, $323 million paid to Leaf Group, a consumer Internet company, in June. Recently, he bought a Virginia Ford dealership for an undisclosed price.

With stocks trading so cheap, buybacks should arguably be a bigger priority than adding businesses to an already complex mix. A bigger dividend would help too—the current yield is just 1%.

In a November note, Huber wrote that Graham Holdings’ valuation is less than four times its annual earnings before interest, taxes, depreciation, and amortization, or EBITDA, using the average of 2022 and 2023 EBITDA. Hue, is about a third of the market. He uses the 2022/2023 average as the company’s TV business outperformed in major election years, such as 2022, due to political advertising.

“These various valuation metrics are too tempting to ignore, and we think the stock has minimal downside risk,” Huber wrote. His price target on the stock is $730, reflecting the 20% group discount applied to a “mix of assets” that mean little to us living together.

In a richly priced market, Graham Holdings is an affordable, asset-rich company with a potential catalyst in the spinoff of its TV business.

Write Andrew Berry [email protected] Feather


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