GHC - Graham Holdings

[Lowlight]

Is anyone else following GHC on their ride down?  Based on my math, GHC trades for $950 million (net of debt) if you give full credit to cash, marketable securities and the over funded pension.  Management's recent presentation illustrates that the remaining Kaplan assets produce good operating income, the broadcasting business (while down in 2015) is still quite valuable, and the remaining assets, including Social Code are performing well.  The broadcasting assets alone should be worth ~$1.4 billion.  If you are looking for an interesting SOP investment with little risk of permanent impairment, GHC seems like a good place to invest.

[prevalou]

I ´ll add the broadcasting business is a two years cycle with the election so the decrease in 2015 operating income is normal. Maybe GHC is depressed because its pension plan has a huge position in

Valeant and if it is a zero it will be a huge blow to pension credit.

[mike]

I ´ll add the broadcasting business is a two years cycle with the election so the decrease in 2015 operating income is normal. Maybe GHC is depressed because its pension plan has a huge position in

Valeant and if it is a zero it will be a huge blow to pension credit.

 

@prevalou, do you have a link to the Valeant position in the pension?

 

I listened to recent presentation, it seems that they have no plan to spin off the broadcasting business and Kaplan. It would be difficult to unlock the value in the two businesses.

[alwaysinvert]

I ´ll add the broadcasting business is a two years cycle with the election so the decrease in 2015 operating income is normal. Maybe GHC is depressed because its pension plan has a huge position in

Valeant and if it is a zero it will be a huge blow to pension credit.

 

@prevalou, do you have a link to the Valeant position in the pension?

 

I listened to recent presentation, it seems that they have no plan to spin off the broadcasting business and Kaplan. It would be difficult to unlock the value in the two businesses.

 

It wouldn't be very clever to say they're spinning off more businesses if they are going to exercise that buyback plan.

[prevalou]

I ´ll add the broadcasting business is a two years cycle with the election so the decrease in 2015 operating income is normal. Maybe GHC is depressed because its pension plan has a huge position in

Valeant and if it is a zero it will be a huge blow to pension credit.

 

@prevalou, do you have a link to the Valeant position in the pension?

 

I listened to recent presentation, it seems that they have no plan to spin off the broadcasting business and Kaplan. It would be difficult to unlock the value in the two businesses.

 

It wouldn't be very clever to say they're spinning off more businesses if they are going to exercise that buyback plan.

 

At 12/31/014 the pension plan had two assets valued at 30%, or $ 730 m. Sequoia is the main portfolio manager, so let's assume the position in Valeant is $ 400m, 1/3 of pension surplus.

 

No question of broadcast spin off because it generates cash flows that can be used for the other  businesses (socialcode) or shares repurchases. It is the heart of the conglomerate at present.

[wabuffo]

so let's assume the position in Valeant is $ 400m, 1/3 of pension surplus.

 

From GHC Q3 10-Q:

http://www.sec.gov/Archives/edgar/data/104889/000010488915000069/d10q.htm

At September 30, 2015, the pension plan held common stock in one investment that exceeded 10% of total plan assets, valued at $580.6 million, or 24% of total plan assets.

 

VRX closing share price on 9/30/15 was $178.38, so barring any sales or buys and at current prices, that position would be ~$300 million today.  Based on VRX share price change alone, the pension surplus would be down to $900m (overall equity markets are generally flat to slightly up since 9/30/15). 

 

On a per GHC share basis, the decline in VRX's share of net surplus would be ~$47.50 per GHC common share, so certainly part of the reason for GHC's slide, but doesn't account for all of it since 9/30.

 

wabuffo

[Lowlight]

so let's assume the position in Valeant is $ 400m, 1/3 of pension surplus.

 

From GHC Q3 10-Q:

http://www.sec.gov/Archives/edgar/data/104889/000010488915000069/d10q.htm

At September 30, 2015, the pension plan held common stock in one investment that exceeded 10% of total plan assets, valued at $580.6 million, or 24% of total plan assets.

 

VRX closing share price on 9/30/15 was $178.38, so barring any sales or buys and at current prices, that position would be ~$300 million today.  Based on VRX share price change alone, the pension surplus would be down to $900m (overall equity markets are generally flat to slightly up since 9/30/15). 

 

On a per GHC share basis, the decline in VRX's share of net surplus would be ~$47.50 per GHC common share, so certainly part of the reason for GHC's slide, but doesn't account for all of it since 9/30.

 

wabuffo

 

I believe they stated that the pension was down ~6.5% in the Q&A portion of the UBS conference so I think these numbers are a little high.  Having said that, my calculation included $1.3 billion in cash and marketable securities and $900 million for the pension asset (I too just assumed they got crushed by Valeant).  I should have mentioned that piece in the post.

[prevalou]

so let's assume the position in Valeant is $ 400m, 1/3 of pension surplus.

 

From GHC Q3 10-Q:

http://www.sec.gov/Archives/edgar/data/104889/000010488915000069/d10q.htm

At September 30, 2015, the pension plan held common stock in one investment that exceeded 10% of total plan assets, valued at $580.6 million, or 24% of total plan assets.

 

VRX closing share price on 9/30/15 was $178.38, so barring any sales or buys and at current prices, that position would be ~$300 million today.  Based on VRX share price change alone, the pension surplus would be down to $900m (overall equity markets are generally flat to slightly up since 9/30/15). 

 

On a per GHC share basis, the decline in VRX's share of net surplus would be ~$47.50 per GHC common share, so certainly part of the reason for GHC's slide, but doesn't account for all of it since 9/30.

 

wabuffo

 

I believe they stated that the pension was down ~6.5% in the Q&A portion of the UBS conference so I think these numbers are a little high.  Having said that, my calculation included $1.3 billion in cash and marketable securities and $900 million for the pension asset (I too just assumed they got crushed by Valeant).  I should have mentioned that piece in the post.

 

According to the conference call the loss was 6.5% ytd for the pension plan. So it makes $ 160 m gross and $ 100 m net of taxes. The surplus would be about $1B gross and $ 600 m after taxes

[LowIQinvestor]

Sequoia Firm's Valeant Stake Brings Pain in Retiree Lawsuit:

http://www.bloomberg.com/news/articles/2016-03-16/sequoia-firm-s-valeant-stake-brings-pain-in-retiree-lawsuit

[mike]

From the latest 10K, the prepaid pension is about $980m.

 

At December 31, 2015 and 2014,

the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $332.4 million and $468.0 million at December 31, 2015 and 2014, respectively, or approximately 15% and 19%, respectively, of total plan assets.

 

I assume the "$332.4 million" is VRX. Let's say it goes to zero and everything else stays the same, the prepaid pension is about $648m.

[dcollon]

Latest earnings report:

 

http://www.ghco.com/phoenix.zhtml?c=62487&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEyMDgxMTQ1JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

[Spekulatius]

This thread went pretty quiet. I guess I am a sucker for owning conglomerates and the stock has declined recently, so I decided to take a look again and found it good and cheap enough for a starter position.

 

I am not sure about management quality, the CEO Timothy O’Shaughnessy came from livingsocial (later Groupon) but I think his main qualification is that he is the son in law of the old man Graham. Jacob Mass also came from the same company (probably Tim’s buddy). I guess I consider them unproven. Perhaps the old man still looks over their shoulder. So far it’s too early to tell, imo.

 

Anyone has an idea what caused the stocks recent decline ? Sympathy with other media companies?

[wabuffo]

Spek - I used to own this as a way to benefit from the spin-out of Cable One (CABO)  I really wanted to own CABO and eventually chucked the GHC part as I couldn't figure out what they were doing. 

 

I think GHC is in desperate need of a shake-up but its never going to happen.  They have some interesting pieces but they seem to be content treading water.

 

What's your estimate of GHC's value?

 

wabuffo

[Spekulatius]

Spek - I used to own this as a way to benefit from the spin-out of Cable One (CABO)  I really wanted to own CABO and eventually chucked the GHC part as I couldn't figure out what they were doing. 

 

I think GHC is in desperate need of a shake-up but its never going to happen.  They have some interesting pieces but they seem to be content treading water.

 

What's your estimate of GHC's value?

 

wabuffo

 

Well, I don’t really have a value #, but I figure as a going concern, they generate ~$300M in FCF with a $3.05B market cap and that’s undeniable cheap. If broken up, it trades probably for 60c on the $.

 

Going with $CABO was the way to invest in retrospect. Going though this thread, that wasn’t entirely clear to all at that time.

[Gregmal]

Useless now perhaps but I was also an owner of this pre CABO(for CABO) and had the displeasure of having a few exchanges with certain NEOs at GHC. I did not get the impression they really gave much of a hoot about shareholders and seemed to rest on the laurels of what this once was. I exited many years ago at around 650ish, and am not surprised to see that the shares have not gone anywhere since.

[wabuffo]

Well, I don’t really have a value #, but I figure as a going concern, they generate ~$300M in FCF with a $3.05B market cap and that’s undeniable cheap.

 

I'm not seeing anything close to that FCF number.

 

For the latest 12 months - I see $167m in cash flow from operations less $115m in capex for a FCF of just $52m.  If you look at net income for the TTM - its $189m.

 

Like I said, they have some interesting parts - but they don't look cheap to me.

 

wabuffo

[Spekulatius]

Well, I don’t really have a value #, but I figure as a going concern, they generate ~$300M in FCF with a $3.05B market cap and that’s undeniable cheap.

 

I'm not seeing anything close to that FCF number.

 

For the latest 12 months - I see $167m in cash flow from operations less $115m in capex for a FCF of just $52m.  If you look at net income for the TTM - its $189m.

 

Like I said, they have some interesting parts - but they don't look cheap to me.

 

wabuffo

 

Wabuffo, you are probably correct. I looked at the 2018 10-k as the 2019 10-k isn’t ready yet. 2019 was an off year for elections, so thr Tv Station earnings are less. In 2018, the earnings were roughly $280M, but $120M were “non cash” from pension fund gains, so those cannot be counted to FCF. Other than that, it seems that Capex roughly  matches depreciation and intangible amortization, so let’s call it flat and we have earnings minus pension fund gains as FCF. For normalization, it is probably a reasonable proxy to average over the last even and uneven years in terms of operating earnings although there are some moving pieces.

 

The pension surplus and gains need to be discounted, but I am not sure by how much of a haircut (40%?). Some folks tend to discount deficits entirely which doesn’t seem prudent, but when doing so, the surplus would need o be discounted to zero as well logically, which imo doesn’t make sense. With a 40% pension surplus haircut, the valuation looks a bit less great than I initially thought.

 

As for corporate action, I would like to put them the Kaplan business on its own feet. The earnings of this business have been unpredictable an while they seem to have some aspects of it with the Purdue deal, there isn’t much visibility on how it will perform going forward.

[wabuffo]

The pension surplus and gains need to be discounted, but I am not sure by how much of a haircut (40%?)

 

A smart management team could use the surplus to help fund acquisitions in industries with pension shortfalls.  For example, GHC could buy TV stations (with defined benefit pension plans) and use their surplus as a partial financing of the acquisition on the cheap (if the acquiree has a pension shortfall).  After the acquisition, the acquiree's pension plan could be merged with GHC's plan(s).

 

I don't think they can withdraw the surplus or deregister the plans without heavy excise penalties and taxes on the gains.  But I'm no expert in this area. 

 

Your point is valid - which is you can't really count the surplus as an asset in a sum-of-the-parts analysis.

 

wabuffo

 

 

[Grahamfan2]

you know, I hope,  that Graham has bought a couple of TV stations where roughly half the consideration was the assumption of pension liabilities. They are looking to do more along those lines but haven't succeeded yet

 

"The acquisition of WCWJ (CW – Jacksonville) and WSLS (NBC – Roanoke) for $60

million in cash and the assumption of approximately $60 million in pension obligations

will allow us to create a duopoly in Jacksonville and also enhance our NBC affiliation. "

[wabuffo]

yes - more of that.  A lot more of that.

 

wabuffo

[no_free_lunch]

There was a GHC write up on VIC.  It has a decent break-down of the various components and valuation estimates.  No position for me.

 

https://www.valueinvestorsclub.com/idea/GRAHAM_HOLDINGS_CO/6175482796

[ValueMaven]

Anyone following this one recently?  Looks really interesting

[rosemontseneca]

I have a position.  I think it's a interesting (but somewhat random) collection of cash-flowing businesses that trade at a discount to the sum of the parts.  Nothing particularly exciting or growthy about any of them IMO, but cheap relative to the broader market on an unlevered cash flow basis with not a lot of downside given the balance sheet.

 

I haven't assigned much value to the venture investments, but was pleasantly surprised with the "found" value from the Megaphone sale this year.  Hopefully Framebridge ends up being worth something also.

 

I have also been pleasantly surprised with the resiliency of the Kaplan business to COVID.

 

I do wonder a bit about capital allocation.  They have bought back quite a bit of stock this year, and I would prefer them to keep doing that vs. competing for acquisitions in a frothy market (unless they can use the overfunded pension as currency).

[CorpRaider]

This LEAF acquisition looks interesting to me.  They have a marketplace business for art/design items: society6.  Instead of operating the "store" like ETSY, the designers upload their designs and society8 handles the manufacture and logistics.  Also owns livestrong.com and ehow and some other interesting assets.  Leaf is trading materially above current cash offer, however.  Doesn't seem like a done deal.

 

My bias:  I am becoming somewhat enamored of these guys. Have been reading the AR/10-Ks.

 

Edited April 27, 2021 by CorpRaider

[CorpRaider]

Listened to the annual meeting.  Really wish someone asked him about the new/second big chunk of options grant for Tim Oshag and how that fits in their historical stated philosophy about compensation.

IDK about the son-in-law, when he was talking about the decentralization and delegation he sounded kind of meh about it.  Didn't crush the question about buybacks/opportunity costs and mentioned something about the board talking about the mix of growth and tech versus other type of companies; sounds like targeting a portfolio of company mix rather than just trying to avoid dumb things/being opportunistic.

Edited May 22, 2021 by CorpRaider