Graham Holdings Company was renamed from The Washington Post Company in November 2013 and is better known for Kaplan University, among it’s diversified portfolio of businesses, including media, healthcare and industrial and commercial indoor lighting solutions.
Other than Graham Holdings Company currently being at it’s 52 week low, as a value investor, we look for cheap and fundamentally good business to buy. Cheap and bad business are not worth the risk in our view.
The earnings per share (EPS) has grown steadily through the years since 2009 from 9.78 to 50.2 (as at FY2018). However it’s gross margin have been on a slide from 56.2% to 37.4%, which I attributed to the acquisition of diversified businesses with lower margins than the education business, in a bid to improve overall revenue of the group.
Looking at the Return on Assets (ROA) and Return on Equity (ROE), it is also relatively unimpressive at around 5% and 10% average respectively. At a debt to equity ratio of 0.16 or 0.48 billion as at 31 Dec 2018, the debt had been slowly creeping up. As at the latest Q3 2019, the debt had grown to 1.04 billion. Perhaps that is why the market had factored in the higher risk of default with the lowered share price.
My intrinsic valuation calculator determined Graham Holding Company’s share price to be at US$867. Factoring in a standard margin of safety of 30% arrives at my figure stated above of $606. At the current share price alone of US$584, it does look attractive as an entry point.
However, as I’ve pointed out above, as value investor, we seek to minimise risk by buying only into cheap AND good companies. Hence I would recommend a higher margin of safety at 40%, hence the buy in price to be at US$520 instead, with a P/E ratio of about 11.6x, just to be extra safe. Good luck and happy trading!