<THE RULE MAKER PORTFOLIO>
Washington Post a Rule Maker?
by Matt Richey (TMF Verve)
ALEXANDRIA, VA (April 19, 1999) -- I've recently become intrigued with The Washington Post Company (NYSE: WPO). As a D.C. area resident, washingtonpost.com is one of my regular Web stops each morning. Is the diversified media blue-chip a Rule Maker? Let's take a look.
The Washington Post Company (WPC) is much more than its flagship newspaper. The company owns six network television stations, Cable One's system of nearly 733,000 subscribers, and Kaplan Educational Centers. Despite the strong growth in the cable, Internet, and educational concerns, the stock has lagged for the past 12 months (click for chart). The company is taking a breather from its glory days of the late-'70s and '80s when the shares soared in value from $80 million in 1973 to $3.5 billion in 1989 -- an average annual gain of nearly 29%. Today, WPC's market capitalization of $4.5 billion is not significantly higher than in 1989.
Part of WPC's fame is due to legendary investor Warren Buffett's substantial stake (17%) in the company. Buffett bought $10.6 million worth of the company in 1972. Nearly 27 years later, his position is now worth approximately $765 million. Such is the wonder of buying and holding world-class companies. What was it about WPC that caught his eye? As detailed in The Warren Buffet Way by Robert Hagstrom Jr., Buffett liked newspapers' high-margin classifieds and advertising revenues, along with their low ongoing capital requirements. In more recent years, however, Buffett's enthusiasm for the newspaper business has waned somewhat as outlets for advertising have blossomed with the arrival of cable television, direct mail ads, and now the Internet.
So, where does this leave the company today?
To get a handle on the company's competitive position, let's take a look at how WPC stacks up to three of its top competitors: Time Warner (NYSE: TWX), Gannett Co, Inc. (NYSE: GCI), and The New York Times Company (NYSE: NYT). I've presented all the numbers in this post on the Rule Maker Companies board. (See bottom of page for a step-by-step explanation of how to post your Rule Maker spreadsheet on the message boards.) You might want to open up that post in another window as we walk through the analysis. Grounded in the belief that a company's direction is more important than its current location, let's focus on the Financial Direction category at the bottom. As you can see, the company only racks up 11 out of 21 possible points. Not too hot, but let's take a closer look.
WPC is in a somewhat unique period of transition right now. As new forms of media such as the Internet gain prominence, WPC is positioning itself to benefit with many new high-growth ventures. For one, the Kaplan education-related businesses are beginning to gain momentum. In 1998, the company opened 32 new Score! centers that offer after-school instruction to kindergarten through eighth-grade children. This marks the third consecutive year that Score! has doubled revenues. In addition, the company's Cable One service will soon offer the opportunity to deliver Internet service and digital cable. Also encouraging is that WPC's CEO and Chairman Donald E. Graham shuns the idea of revenue growth for its own sake. This management team is clearly focused on investing in high profitability opportunities. At the same time, WPC has stated that it is willing to lose money for a period of time if an investment will eventually generate solid profitability. The company's Internet investments fall into that category right now. As of October last year, the washingtonpost.com site was recording 67 million page views a month, making it one of the top five general news sites in the country. Nevertheless, washingtonpost.com is bleeding red and will continue to do so for the foreseeable future. WPC is making strides to reach profitability with its Internet classifieds by launching new sites to penetrate the apartment rental, new home, and automobile markets.
Finally, WPC impressed me with its unique candor. Warren Buffett, as a longtime director of the company, indelibly pressed upon management his values of forthrightness with shareholders and the single-minded pursuit of long-term intrinsic value. Here's an excerpt from Chairman Graham's letter to shareholders:
"Our unwavering aim, imperfectly realized, is the best use of every dollar for your benefit to increase profit and strengthen business franchises on the way to growth in value. We are not at all interested in quarterly results (and we can guarantee they won't present a smooth or predictable pattern of any kind). As we grow the value of our company (and your share of it), we are willing to lose money this year if we believe we'll profit in the future from the investment. When we say this, we expect you to hold us accountable for the increase."
Fans of Buffett will immediately recognize the Buffett-like qualities of that statement. Rule Maker investors may want to watch this company in the months and years ahead. If the company successfully executes on its vision to provide profitable services through cable and the Internet, the financial model of repeat-purchase, low-cost products would lend itself well to Rule-Makerhood.
For more on The Washington Post Company, Dale Wettlaufer wrote about the company in a Bore Report last month.
Foolish poster "lrobinso" (the LanceMan) discovered a small error in the spreadsheet over the weekend. The fix is very simple and explained in this post. Alternatively, you can simply re-download the corrected version using the links below.
We have a new Question of the Week. Next week, Phil Weiss (TMF Grape) returns to this space, and one day he wants to run a company of your selection through the Rule Maker paces. Submit your selection on the Rule Maker Companies board. Phil will be selecting the winner on the basis of Foolishness, humor, and thoughtful reasoning in explaining why you think your company deserves to be ranked and analyzed.
Also, let me remind everyone of our contest for archiving Rule-Maker rankings. The first ten individuals to post five or more rankings on our Companies board will receive an autographed copy of Rule Breakers, Rule Makers. For more info, click here.
Finally, I've received several questions about how to post spreadsheet results on the message boards. Here are the steps:
- Save your results from Excel as a "formatted text (space delimited)" file.
- Close Excel.
- Re-open the file in WordPad or NotePad.
- From there, copy and paste your results into the message board post.
- Be sure to click the "Table Data" box.
- Choose "Preview Message" to make sure everything looks as it should.
- Submit message.
I hope to see you on the message boards. Enjoy your evening.
- Rule Maker Strategy Board
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- Rule Maker Spreadsheet (Excel 97, 68k)
- Rule Maker Spreadsheet (Excel 95, 41k)
Day Month Year History R-MAKER -3.80% -2.88% 8.17% 36.88% S&P: -2.24% 0.24% 5.22% 30.20% NASDAQ: -5.57% -4.72% 6.97% 41.91% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 48 Microsoft 39.13 81.00 106.98% 5/1/98 55 Gap Inc. 34.37 63.63 85.12% 6/23/98 34 Cisco Syst 58.41 100.00 71.20% 2/3/98 22 Pfizer 82.30 117.75 43.08% 2/13/98 44 Intel 42.34 55.50 31.09% 2/17/99 16 Yahoo Inc. 126.31 163.69 29.59% 5/26/98 18 AmExpress 104.07 126.13 21.20% 2/6/98 56 T. Rowe Pr 33.67 36.97 9.79% 8/21/98 44 Schering-P 47.99 48.50 1.06% 2/27/98 27 Coca-Cola 69.11 64.81 -6.21% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 82.25 27.85% 3/12/98 17 General Mo 72.41 90.00 24.30% 3/12/98 15 Chevron 83.34 101.94 22.31% 3/12/98 20 Eastman Ko 63.15 74.75 18.37% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 48 Microsoft 1878.45 3888.00 $2009.55 5/1/98 55 Gap Inc. 1890.33 3499.38 $1609.05 6/23/98 34 Cisco Syst 1985.95 3400.00 $1414.05 2/3/98 22 Pfizer 1810.58 2590.50 $779.92 2/17/99 16 Yahoo Inc. 2020.95 2619.00 $598.05 2/13/98 44 Intel 1862.83 2442.00 $579.17 5/26/98 18 AmExpress 1873.20 2270.25 $397.05 2/6/98 56 T. Rowe Pr 1885.70 2070.25 $184.55 8/21/98 44 Schering-P 2111.7 2134.00 $22.30 2/27/98 27 Coca-Cola 1865.89 1749.94 -$115.95 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1645.00 $358.30 3/12/98 17 General Mo 1230.89 1530.00 $299.11 3/12/98 15 Chevron 1250.14 1529.06 $278.92 3/12/98 20 Eastman Ko 1262.95 1495.00 $232.05 CASH $70.09 TOTAL $32932.47
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and
it adds $2,000 in cash (which is soon invested in stocks) every six months.