June 17, 1998
Stocks for Dad

To Dad from Chris
by Chris Rugaber (TMF RFK)

The Washington Post Company
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1150 15th Street, N.W.
Washington, D.C. 20071
http://www.washpostco.com/ $544 as of June 15, 1998

As a former reporter and lifelong newspaperman, Dad, it is certainly fitting on this Father's Day to recommend to you the stock of The Washington Post Co. -- even if a couple of upstarts from that paper hogged all the credit for one of the biggest newspaper stories of the last thirty years, which you also worked on.

As a reporter for one of the Post's main rivals, The New York Times, you certainly did quite a bit of original reporting on the Watergate story, yet you received only a fleeting reference in the movie version of All the President's Men. I'm sure that if it was you who'd gotten the lucky breaks in the end, you and the Times would have shared the credit.

So, it may be an unpleasant Father's Day gift to recommend The Washington Post Co.'s stock to you. The Times, also a public company, is probably one of the best newspapers in the world. But, unfortunately, the Post is a better investment. While 89% of The New York Times Co.'s revenue is derived from newspapers, only 42% of the Post's revenue flows from its newspaper division. Given the somewhat cyclical nature of the newspaper business, the Post's other sources of income are very important.

The Post also owns Newsweek magazine, the second largest-circulation news weekly in the country; a small newspaper chain in Washington State; and the Gazette newspapers, a chain of local papers in suburban Maryland. In addition, the Post Co. is branching out beyond the traditional media of newspapers, magazines, and broadcasting. Its website includes some original content, especially on entertainment and lifestyles in the Washington, DC area. It also operates Legi-Slate, an online legislative information service for Congressional staff and lobbyists. In addition, the Post recently purchased several high-tech trade magazines that are already increasing profits.

The Post's most interesting non-media subsidiary, though, is Kaplan Educational Centers, a growing for-profit education company that is expanding beyond its traditional test-preparation business. Through its Score Learning Centers, Kaplan also provides after-school tutoring and other educational services to public school students.

The Post Co. has made some mistakes in its pursuit of new media. Recently, it was forced to a write-off a CD-ROM company it had purchased at a cost of $23 million. Nevertheless, the company is working methodically to diversify itself, and more importantly, to avoid being caught off-guard by the rapid pace of change in the media world. The Post's newspaper may be its flagship product, but the company is not complacent about the threats that newspapers face in a less literate, more digital world.

Let's not forget the flagship product, though. The Washington Post is America's political newspaper -- and even those convinced it is the global headquarters of the liberal media conspiracy frequently must read it simply to know what it may say about them, or their bosses, or their enemies. Read any political memoir of the past 10-20 years and notice the numerous references to Post stories that impact those in power. In short, within Washington at least, it has established a brand that will prove pretty resilient in any economy.

So Dad, you probably know most of this anyway. The Post is a good paper, and the Post Co. is a good business. But is the stock a good investment? Well, it doesn't hurt that Warren Buffett thinks so: Berkshire Hathaway owns about 17% of the company.

Revenue has steadily increased in the past several years, from $1.49 billion in 1993 to $1.95 billion last year. Operating margins have increased from 15.8% to 19.5% in the last two years, and profit margins have also increased. Thanks in part to an extensive share buyback program and a one-time sale of some of assets, earnings per share (EPS) grew from $20.05 in 1996 to $26.15 last year. After backing out the one-time gains, '97 EPS looks more like $22.00 -- still a 10% increase. Consensus estimates are for $26.27 EPS for 1999, roughly a 20% increase over two years. The longer term also looks good, thanks in part to a healthy balance sheet that is free of long-term debt. By the way, Dad, don't be put off by the high share price. All it shows is that the Post Co. isn't fond of stock splits.

Finally, regarding the more fundamental challenges that all newspapers face: The Wall Street Journal recently reported a new study that found that only 28% of respondents under 30 recently read a newspaper, compared to 69% of the senior citizens. As you know, Dad, this is the kind of number that makes people in the newspaper business sweat. But the Post's brand name, diversification, and exploration of new media make it well-equipped to face such challenges. I am happy to recommend it to you this Father's Day.

* A Stock for dad represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.