GHC: Be Wary of Graham’s Identity Crisis

Graham Holdings (GHC), is a diversified education and media holding company with four principal areas of operation: education, cable, television broadcasting and other, which are further explained below.

graham-holdings-logo_2Graham’s educational business constitutes 62% of its total revenue and is managed through Graham’s Kaplan subsidiary. Kaplan offers a range of education related services including, Kaplan higher education that offers a series of certificates, diplomas and degree programs and accounts for approximately half of Kaplan’s revenue. Kaplan Test Preparation, which offers pre-college, graduate, health and bar review services, accounts for approximately 13% or Kaplan’s revenue. Kaplan International, which operates the company’s Europe and the Asia Pacific region businesses and accounts for 37% of revenue. Finally, Kaplan Corporate accounts for less than 1% of revenue and includes not only shared services but also is responsible for the identification and investment in high-growth educational technology companies.

Graham’s cable operations account for 23% of total company revenue and are managed through Cable One, which owns and operates cable systems in 18 mid-western and southern states. Graham’s television broadcasting operations account for 11% of total company revenue and are managed through its Post-Newsweek Stations subsidiary that owns six television stations located in Florida, Michigan and Texas.

Graham’s other business operations account for only 4% of its total revenue but is made up of six distinct businesses:

  • The Slate Group LLC, an on-line magazine;
  • The FP Group, publishes a foreign policy magazine and associated website;
  • Trove, a digital innovation team focused on building products and technologies in the news space;
  • Social Code LLC, a social-media marketing technology company;
  • Celtic Healthcare, Inc., a Medicare-certified home and hospice services provider; and
  • Forney Corporation, a global supplier of products and systems that control and monitor combustion processes.

Graham sold the majority of its namesake newspaper, The Washington Post, in 2013 for $250 million and has since changed its name to Graham Holdings.

GHC – Earnings Summary

Graham ended 2013 on a good note reporting net income from continuing operations for the fourth quarter of $55.6 million compared to a loss of $51 million in the same period the previous year. In March, Graham came to an agreement with famed investor Warren Buffet in which he exchanged all of Berkshire Hathaway‘s (BRK-A) shares in Graham for a Miami-based TV station, WPLG, a number of Berkshire shares currently held by Graham Holdings and some cash.

For the first quarter, Graham reported income from continuing operations of $79.5 million compared to $47.1 million in the same period in 2013. Revenues were $840.6 million up 2% from the previous year. Revenue from Graham’s educational operations was flat for the quarter but operating income increased to $2.4 million from a $4.1 million loss. Cable revenue increased 2%, with operating income growing 12%, and the television broadcasting segment saw sales increase 24%, with operating income increasing 52%.

In the second quarter, Graham reported several small acquisitions that were incorporated in the other business segment along with revenue of $878.6 million, which is up 1% from last year, and operating income of $94.5 million compared to $96.3 million the previous year. Although the television broadcasting and other business segments saw revenue increases, they were offset by declines in the cable business and flat in Graham’s educational business.

GHC – Stock Analysis

GHC stocks is not easy to value. Although a majority of Graham’s business is focused on education, cable and television broadcasting are delivering most of the earnings. With each business segmenting operating independently with different drivers, it makes sense to look at the business not as one entity but as a conglomerate of separate unique businesses.

Graham’s price-to-earnings ratio is 8.36 compared to an industry average of 21.6 but has a price/earnings-to-growth of 3.5, placing it clearly in the overvalued range on slow forward growth. Cable and television broadcasting should help drive the business into next year, but Graham’s Kaplan division will remain challenged for some time. Graham has $1 billion in an over-funded pension plan and an overall healthy balance sheet, but neither of that matter unless there is growth and/or dividends and share buybacks to increase investor returns.

Graham appears to investing its capital to find and grow new businesses segmented in other business, but I am unclear as to what strategy they are pursuing. Does Graham want to be a media company, an education company, a healthcare or manufacturing company or something else?

Graham Holdings Stock Chart

With a year-to-date return that is approximates the S&P 500, investors interested in the stock should sell Graham and buy the S&P for less risk, until such point management can clearly articulate its long-term business strategy to investors, then re-evaluate based on the new criteria.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at or follow him on his blog at

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