The Washington Post Co.'s
To $730. Never mind.
Washington Post, owner of the eponymous newspaper, several smaller newspapers, Newsweek magazine, CableOne cable television provider, six television stations, and education company Kaplan turned in growth of more than 10%, to $706 million. The largest gains came from rocketing top-lines at Kaplan, up more than 40%. In fact, for the first time ever, the company's name is a bit of a misnomer, since another division besides the Post led in revenues. I wouldn't hold my breath for a name change -- this isn't an organization that makes rash decisions.
Earnings for the quarter were down substantially at $19.9 million, or $2.06 per share, vs. $4.99. The main culprit was executive compensation policies put in place long ago at Kaplan. In September, the Post announced that it would make a tender offer for about 55% of all outstanding Kaplan stock options, at a cost of about $138 million, or 10% above the current price. Needless to say, given the premium, option holders leapt at this opportunity to cash in early and high. As such, the Post had to realize a $74 million expense for stock-option compensation for the quarter, and will pay out $117 million in the current quarter, with payments trailing off into 2006.
That's a heck of a lot of money, and it chewed up reported earnings -- something most companies would not do, to their detriment. In this case, the Post is able to close out a compensation burden on shareholders that was not of its making and greatly reduce the stock-option overhang. But you'd expect a company to offer to buy its own stock (or a derivative thereupon) when prices were low, not high. What on earth is the Washington Post thinking buying back shares now?
First, Kaplan, though a subsidiary of Washington Post, isn't wholly owned by the Post, and the stock options weren't based on the Post's stock, but on Kaplan's (which doesn't trade, so it's price is set by the board). By buying out the options, the Post acquires shares that would have diluted its ownership of Kaplan -- it will now control 95% of all shares. And it gets rid of an options burden it tripped into, while cashing out management that has done a good job growing the business.
Certainly, the Post would have been happier not paying out those massive compensation costs, but the company was on the hook for them, saw an opportunity to fix a few problems, and bought away. The Post's CEO Donald Graham's honesty about this deal is refreshing:
At the time we established the plan, we never in our wildest dreams thought Kaplan could grow so fast in revenues and profits. This year Kaplan's revenues are expected to be greater than those of The Washington Post newspaper. While the payments we propose today are large, we believe they are well-justified by Kaplan's results and prospects.
There's something else. Though the Post isn't much for conference calls and grandiose statements, given Kaplan's growth trajectory, it's possible that management thought they were getting a pretty good deal by capping their exposure to these options now. That's generally only the case if the top brass seeks blue skies ahead.
Investors need to bear in mind that the Post's earnings were hamstrung by this one-time charge. Over the next 12 months the Post's stock multiples to earnings will be distorted as a result. Just remember if you hear that the Post is getting hammered for trading at high earnings multiples, that next year's third quarter won't include this one-time charge, and it may be that the company is cheaper than it looks.
All the same, that's a big piece of change to be paying out. If it weren't for the company's sparkling history of treating its shareholders' equity well, I'd be much more nervous. The Post gets the benefit of the doubt in this case.
