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Berkshire Hathaway
The Washington Post: Not Just a Newspaper

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By Tiddman
January 17, 2008

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The Washington Post is not a newspaper business. It isn't even a print business. It is a rapidly growing, international for-profit education business, with some media interests that include a cable franchise and six VHF TV stations. A small minority of business is print publishing.

Without looking, tell me what percentage of revenues and earnings WPO derived from its print business in the most recent quarter. Okay well it's impossible to play that game on the internet, so here it is:

Revenues:

Education 50.3%
Newspaper 20.6%
Cable 15.4%
TV 7.6%
Magazine 6.1%

Operating income:

Education 34.0%
TV 32.6%
Cable 27.0%
Newspaper 7.9%
Magazine 6.3%

Yes, less than 15% of WPO's operating earnings come from the print businesses that were once the juggernaut of the Washington DC area.

WPO's education business is conducted through Kaplan. The numbers there completely blew me away when I checked them out recently. In 1994, Kaplan had revenues of $75 million and lost $4 million. In 2006 revenues were $1,684M and operating income was $130 million. Revenues have grown 34% CAGR since 1997, while employees have grown at 20% CAGR.

Don Graham attributes these astonishing results to Jonathan Grayer, who took over as CEO of Kaplan in 1994 at the age of 29. Prior to that, Kaplan was primarily a testing preparation business that was occasionally profitable. Since then, it has expanded into higher education, K-12, professional training and education, and has moved outside of the US into Canada, UK, Ireland, Singapore, Hong Kong, and Australia. This is a legitimate growth stock.

Kaplan has grown partially organically and partially through acquisitions. Since inception, WPO has spent $950M on acquisitions for Kaplan, including the original purchase. These cash flows have come from WPO's other lines of business, so they are successfully diversifying away from the dying print business and into an exciting international growth area.

These cash flows are impressive, in the first 9 months of 2007, WPO generated $457 million from operations, and should generate more than $600 million in the whole year. With a market cap of around $7.6 billion, this is 12x cash flows, which seems a bit cheap. I think the company is mistakenly being valued as a declining media business.

With cap ex expected to be in the $250-280M range for 2008, WPO can spend plenty to expand its cable and Kaplan businesses while having plenty of completely free cash flow leftover for things like dividends and share buybacks. Across all business units, cash flows should increase at around 8-10% per year going forward, and this should accelerate as the higher-growth units continue to eclipse the stagnant and declining units.

I find this transformation amazing, as I suspect most people had, like me, forgotten about the Post, and assumed it was fumbling along trying to stem the inevitable decline of its newspaper business. Instead, WPO has found new life as a leader in the for-profit education business, and is extremely well funded to continue its growth. Perhaps it is no surprise that Longleaf's small cap fund made WPO its top position in Q3 2007 at 7% of assets.