The fundamentals of both of these media companies—the parent and the new spinoff look attractive, based on discounted valuation.
Graham Holdings (GHC) and Cable One (CABO)
from Ian Wyatt’s Million Dollar Portfolio
One of my favorite media stocks is Graham Holdings (GHC). You’re probably more familiar with the company by its former name—The Washington Post Co. The company changed its name after selling its flagship Washington Post newspaper to Amazon (AMZN) CEO Jeff Bezos.
When I first recommended Graham Holdings, it was because of the attractive value of its assets. At the time of the recommendation, Graham shares traded at $985. But my analysis pegged the true value of the company’s assets at a 30% premium.
Graham is focused on creating value for shareholders by selling its assets. That was one catalyst that I thought could help send shares higher. In my original report, I noted that the company had announced plans for a tax-free spinoff of its Cable One subsidiary.
Cable One delivers cable television and high-speed Internet services to nearly 700,000 customers in 19 states. With revenues of $798 million in 2014, this is the second-biggest piece of Graham’s business.
On July 1, Graham completed the spinoff of Cable One as a separate publicly traded company. Existing Graham shareholders received one share of Cable One (CABO) for every share of Graham Holdings that they owned prior to June 15.
If you owned shares of Graham before June 15, you’ll notice a few things.
First, you’ve received shares of Cable One in your brokerage account. If you owned 100 shares of Graham, you now also have 100 shares of Cable One. These shares opened on July 1 at $450.
Second, the share price of Graham declined by a similar amount. On June 30, Graham shares closed at $1,075. They opened on July 1 at $653. You’ll notice that the difference between these numbers is $422—nearly identical to the value of Cable One shares that were spun off.
In the Million Dollar Portfolio, I bought Graham Holdings on Feb. 23 at $982.93 per share.
Today, my Graham Holdings shares are each valued at $707. I also own Cable One shares that are each valued at $390. The combined value of these shares is $1,097. That means that this investment is currently posting an 11.7% return, even though it may look like the Graham stock is down.
The outlook for both Graham Holdings and Cable One is bright.
My analysis indicates that Graham Holdings stock is worth $844 per share, based on the value of the assets. That’s a 19.4% premium to the recent share price, giving sold upside to the stock.
Similarly, Cable One shares are undervalued. My analysis values the company at 10 times EBITDA, or $3 billion. That translates into a share price of $513, or a 31.5% premium to the recent share price.
You’ll notice that Cable One shares have fallen 13.3% since their spin off. This is quite common for shares of spinoffs. It happens because existing shareholders will often immediately sell shares of the spun off company. That creates downward pressure on the share price immediately following the spinoff, and can create an attractive buying opportunity.
However, recently spun off companies tend to perform well in the years following their separation. That’s because these newly public companies can operate without the influence of a larger holding company. Plus, their executives tend to be highly incentivized to lead their independent company.
I’m going to closely monitor Cable One shares in the coming months. Once the initial selling pressure on this spinoff slows down, I may add to the position. For the time being, I plan to continue holding shares of both Graham Holdings and Cable One. I expect market-beating returns from both stocks in the next year.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.100kportfolio.com, 802-434-6900, July 15, 2015