UNCOVERING VALUE: Graham Holdings Sum of the Parts The multi-business conglomerate is decidedly out of fashion on Wall Street – possibly the best argument for value investors to give them a closer look. One representative example of note: Don Graham’s Graham Holdings.

Conglomerates with disparate lines of largest businesses by estimated value are under the Kaplan brand name. Its remain- business are often fertile ground for value its Cable ONE subsidiary, which provides ing media-related assets include Social- investors. High-profile trouble in one area video and Internet services to 700,000 Code, a social-media marketing company, may be masking ultimately more impor- mostly rural customers in the U.S., its Gra- and the online magazine Slate. More re- tant success in another. The array of dif- ham Media Group, which owns broadcast cent acquisitions have taken it even further ferent industries represented in such com- TV stations in Houston, Detroit, Orlan- afield, into home-healthcare and hospice panies can make them more difficult to do, San Antonio and Jacksonville, and its services, as well as industrial combustion understand, analyze and value. Through Education segment, which offers degree- equipment. spinoffs and divestitures, their far-flung granting programs and test-preparation The current black sheep of the family portfolios of businesses also offer a variety services in the U.S. and abroad primarily is Kaplan, which like all for-profit educa- of catalysts for unlocking value. A recent special report from Boyar’s INVESTMENT SNAPSHOT Intrinsic Value Research cites two key Graham Holdings Valuation Metrics reasons for now being a particularly op- (NYSE: GHC) (@10/30/14): portune time to seek out mispriced value Business: Formerly The Washington Post GHC S&P 500 in conglomerates. For one, it argues that Co., now a diversified holding company with P/E (TTM) 9.6 18.4 such companies can offer “uncorrelated primary operations in cable and broadcast Forward P/E (Est.) n/a 16.2 return potential” in an increasingly vola- television and for-profit education. EV/EBITDA (TTM) n/a tile and arguably fully priced market. In Share Information Largest Institutional Owners addition, it expects such companies to at- (@10/30/14): (@6/30/14): tract greater scrutiny from activist inves- Price 770.80 Company % Owned tors, who have increased both in number 52-Week Range 604.09 – 773.47 Southeastern Asset Mgmt 13.9% Dividend Yield 1.3% and also in their ambition to go after ever- Vanguard Group 7.0% Market Cap $4.44 billion larger companies. The Boyar report cites BlackRock 5.0% as support for that notion a recent quote Financials (2013): State Street 3.2% from activist Nelson Peltz of Trian Part- Revenue $3.49 billion Dimensional Fund Adv 3.1% ners: “You’ve got to earn the right to be Operating Profit Margin 9.9% Short Interest (as of 10/15/14): a conglomerate. The individual businesses Net Profit Margin 6.8% Shares Short/Float 1.1% need revenue growth similar to or better than their standalone competitors, and GHC PRICE HISTORY 800800 800 their margins better be best-in-class.” Close

0.0 0.2 0.4 0.6 0.8 Graham Holdings, formerly The Wash- 1.0 700700 700 ington Post Co. prior to the sale of its namesake newspaper to Amazon’s Jeff 600600 600 Bezos, ticks most of the boxes for an at- 500 tractive conglomerate investment today, 500 500 says Jon Boyar of Boyar Intrinsic Value. 400 400 Its unusual business mix limits Wall Street 400 research coverage. Recent troubles in one 300 300 300 business appear to be obscuring strengths 2012 2013 2014 in others. Sales of non-core assets have made it flush with cash to invest or to re- THE BOTTOM LINE turn to shareholders. Last but not least, Largely neglected by Wall Street due to its hodgepodge of businesses and a reputation- “the stock is cheap,” says Boyar, trading al hit to its best-known one, the company appears to be reorienting itself to improve op- at what he considers a 40% discount to its erating performance and unlock latent value, says Jon Boyar. His firm’s sum-of-the-parts analysis – based on 2016 estimates – values the stock at around $1,260 per share. sum-of-the-parts intrinsic value.

“Diversified” certainly describes Gra- Sources: Company reports, other publicly available information ham’s portfolio of businesses. Its three

October 31, 2014 www.valueinvestorinsight.com Value Investor Insight 1 UNCOVERING VALUE: Graham Holdings

tion providers has struggled with increas- shifts toward high-speed data customers The eventual realization of that value ing regulation and declining enrollment and as upgraded technology expands ad- rests heavily on the capital-allocation fostered by prior-years’ marketing-related vertising revenue potential. skills of Graham Holdings’ CEO Donald malfeasance. Careful not to call a bottom What are Graham’s component parts Graham, who owns 20% of the compa- for the business as enrollment trends re- worth? For Cable ONE, Boyar assumes ny and, through a dual-share structure, main negative, Boyar’s Mark Boyar notes an 8x multiple – in line with comparable maintains full control of its destiny. Ten that Kaplan’s cash generation has mark- transactions – on its 2016 EBITDA esti- years ago those skills would have been edly improved – it earned $151 million in mate, resulting in an equity value of $2.7 deemed first-rate, but the precipitous val- EBITDA in 2013, up from $12 million the billion. For the TV stations, it applies a ue declines since of the Washington Post year before – and that the company is “do- 10x multiple to its blended 2015 and 2016 newspaper franchise and of Kaplan raise ing everything possible to hold itself out EBITDA estimates – bolstered by growth legitimate concerns. Jon Boyar acknowl- as an exemplar of proper conduct in the in political advertising and increasing re- edges the risk in betting on Don Graham, space. We believe it will emerge as best-in- transmission fees earned from pay-TV but says he believes the company’s all-star breed when the regulatory environment is providers – to arrive at an estimated value board of directors – including IAC/Inter- more settled.” of $1.9 billion. Estimated 2016 cash and Active Chairman Barry Diller, Markel The Cable ONE business, while highly securities, at $1.4 billion, are the next- Corp. President and Chief Investment Of- profitable, is also not firing on all cylin- largest store of value, followed by Kaplan, ficer Tom Gayner, and Davis Select Advis- ders, with results dampened by decreasing at $1.1 billion, two-thirds of which is as- ers’ Chairman Chris Davis – provides con- video-subscriber counts and heavy spend- cribed to its international operations. Net- siderable support. In any event, he doesn’t ing on technology upgrades that will result ting out corporate overhead and debt and expect Graham to sit on his hands this in a fully digital platform by the end of adding in all other assets – including the time around when it comes to realizing 2015. While Mark Boyar doesn’t expect discounted value of the company’s $1.2 value: “Our thesis isn’t at all predicated high growth for the business, he does see billion in pension over-funding – Boyar on him selling everything off, but over the upside by it improving industry-lagging estimates intrinsic equity value at $7.4 bil- past year he’s shown that nothing is off revenue-per-customer metrics as its mix lion, or just over $1,260 per share. limits. That’s clearly a positive.” VII

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October 31, 2014 www.valueinvestorinsight.com Value Investor Insight 2