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 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – September 2014. 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 specific look at how Graham Holdings Company (GHC) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Graham Holdings Company, formerly The Washington Post Company is a diversified education and media company whose principal operations include educational services, television broadcasting, cable television systems, and online, print and local TV news. The Company owns Kaplan, a provider of educational services to individuals, schools and businesses, serving over one million students annually with operations in more than 30 countries. Its programs include higher education, test preparation, language instruction and professional training. Its Post-Newsweek Stations, Inc owns six television stations which include WDIV-Detroit (NBC), KPRC-Houston (NBC), WKMG-Orlando (CBS), KSAT-San Antonio (ABC) and WJXT-Jacksonville (independent). In July 2014, Berkshire Hathaway Inc acquired wholly owned subsidiary of Graham Holdings, including WPLG, a Miami-based television station. In July 2014, Graham Holdings Co acquired majority interest in Residential Healthcare Group Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
Valuation Summary
Key Data:
| Recent Price | $726.28 |
| MG Value | $182.57 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $314.03 |
| Value Based on 0% Growth | $184.09 |
| Market-Implied Growth Rate | 12.52% |
| NCAV | -$178.92 |
| PEmg | 33.54 |
| Current Ratio | 1.24 |
| PB Ratio | 1.90 |
Balance Sheet – 6/30/2014
| Current Assets | $1,135,600,000 |
| Current Liabilities | $915,800,000 |
| Total Debt | $398,200,000 |
| Total Assets | $5,289,700,000 |
| Intangible Assets | $1,945,800,000 |
| Total Liabilities | $2,457,800,000 |
| Outstanding Shares | 7,390,000 |
Earnings Per Share
| 2014 (estimate) | $27.75 |
| 2013 | $25.78 |
| 2012 | $6.09 |
| 2011 | $15.23 |
| 2010 | $34.26 |
| 2009 | $9.78 |
| 2008 | $6.87 |
| 2007 | $30.19 |
| 2006 | $34.21 |
| 2005 | $32.59 |
| 2004 | $34.59 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $21.66 |
| 2013 | $18.48 |
| 2012 | $14.71 |
| 2011 | $19.10 |
| 2010 | $21.71 |
| 2009 | $17.86 |
Dividend History
GHC Dividend data by YCharts
Conclusion:
Graham Holdings does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has concerns with the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is concerned by the high level of debt relative to the current assets as well as the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation perspective, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $21.71 in 2010 to an estimated $21.66 for 2014.  This demonstrated lack of growth does not support the market’s implied estimate of 12.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out the previous ModernGraham valuations of Graham Holdings Company (GHC) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Graham Holdings Company (GHC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Graham Holdings Company (GHC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
Leave a Reply