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Graham Holdings Company Valuation – May 2016 $GHC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Graham Holdings Company (GHC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Graham Holdings Company is a diversified education and media company. The Company’s operations include educational services; television broadcasting; online, print and local television news; social-media advertising services; home health and hospice care, and manufacturing. The Company’s segments include Kaplan Higher Education, which provides a range of certificate, diploma and degree programs; Kaplan Test Preparation, which includes the Company’s test preparation businesses in pre-college, graduate, health and bar review, as well as new businesses in new economy skills training and in career advising; Kaplan International, which operates businesses in Europe and the Asia Pacific region; television broadcasting, which include operations that are conducted through over five very high frequency television stations serving the Detroit, Houston, San Antonio, Orlando and Jacksonville television markets, and other businesses, which include The Slate Group, The FP Group and SocialCode.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of GHC – May 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,663,504,889 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.18 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 330.64% Pass
6. Moderate PEmg Ratio PEmg < 20 10.03 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.11 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.18 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.46 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

GHC value Chart May 2016

EPSmg $47.86
MG Growth Estimate 15.00%
MG Value $1,842.48
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $693.92
MG Value based on 0% Growth $406.78
Market Implied Growth Rate 0.77%
Current Price $480.08
% of Intrinsic Value 26.06%

Graham Holdings Co is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor is only concerned with the lack of earnings stability over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $17.69 in 2012 to an estimated $47.86 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.77% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Graham Holdings Co performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

GHC Charts May 2016

Net Current Asset Value (NCAV) -$47.22
Graham Number $65.05
PEmg 10.03
Current Ratio 2.18
PB Ratio 1.11
Dividend Yield 2.43%
Number of Consecutive Years of Dividend Growth 1

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Useful Links:

ModernGraham tagged articles Morningstar
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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information Mar2016
Total Current Assets $1,605,489,000
Total Current Liabilities $735,832,000
Long-Term Debt $398,710,000
Total Assets $4,312,525,000
Intangible Assets $1,361,624,000
Total Liabilities $1,872,392,000
Shares Outstanding (Diluted Average) 5,652,000

Earnings Per Share History

Next Fiscal Year Estimate $24.55
Dec2015 -$17.87
Dec2014 $195.03
Dec2013 $32.05
Dec2012 $17.39
Dec2011 $14.70
Dec2010 $31.04
Dec2009 $9.78
Dec2008 $6.87
Dec2007 $30.19
Dec2006 $33.68
Dec2005 $32.59
Dec2004 $34.59
Dec2003 $25.12
Dec2002 $21.34
Dec2001 $24.06
Dec2000 $14.32
Dec1999 $22.30
Dec1998 $41.10
Dec1997 $26.15
Dec1996 $20.05

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $47.86
Dec2015 $55.76
Dec2014 $81.06
Dec2013 $23.05
Dec2012 $17.69
Dec2011 $18.06
Dec2010 $20.60
Dec2009 $17.79
Dec2008 $23.73
Dec2007 $31.85
Dec2006 $31.61
Dec2005 $29.56
Dec2004 $26.66
Dec2003 $22.27
Dec2002 $22.11
Dec2001 $23.52
Dec2000 $23.76

Recommended Reading:

Other ModernGraham posts about the company

10 Most Undervalued Companies for the Defensive Investor – February 2016
10 Low PE Stocks for the Defensive Investor – February 2016
10 Companies Benjamin Graham Would Invest In Today – February 2016
10 Low PE Stocks for the Defensive Investor – January 2016
10 Low PE Stocks for the Defensive Investor – December 2015

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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