TODD LOWENSTEIN
PORTFOLIO MANAGER
HIGHMARK VALUE MOMENTUM FUND

COMPANY: Washington Post
TICKER: WPO (NYSE)
PRICE: $747.50 (as of 4 p.m. Friday)
52-WEEK RANGE: $716-$907
MARKET CAPITALIZATION: $7.18 billion

Todd Lowenstein is the portfolio manager of the Highmark Value Momentum Fund (HMVMX) with more than $430 million under management.The Washington Post is a diversified publishing and education company. Mr. Lowenstein spoke to David Dalley of The New York Sun about why WPO is a strong investment.

What does WPO do?

It’s a diversified company with operations in news publication, principally the flagship paper, the Washington Post, as well as magazine publication, primarily Newsweek. They also have a cable division with about 700,000 subscribers. One of the most interesting aspects is a for-profit education business that they own called Kaplan. That’s where the real story is here.

Why do you like the company?

The newspaper and magazine businesses are under some pressure, given the secular changes occurring in the industry. Ad dollars are shifting online. They’re having to evolve their business models to deal with the new landscape. However, we think that their brands are good enough that they’ll weather the storm just fine, but it will be tough going for the news businesses.

Meanwhile, they’re taking the great cash flows from the mature businesses and plowing them back into the high profit business, Kaplan. The investment that WPO has made in the cable and education businesses has depressed overall margins a little, but we think that it’ll pay off, and that those units will drive earnings growth over the next five years.

It’s a diversification strategy, and their cash flow should be less volatile going forward. One problem with newspaper and magazines is that they’re heavily dependent on advertising, which is tied into the business cycle. The newer businesses are much more independent of the business cycle. Profits from the education business is counter-cyclical. Laid off workers during a recession or a slow period, for example, are more likely to use the services to retrain and get extra qualifications.

What do you think the company’s worth?

We’re value investors so we try to buy things at a discount to what we think they’re worth. When we analyze WPO and put assigned values on all the component pieces, and value them as independent companies based on peer group multiples, we get a price somewhere between $925 and $950. It’s trading at around $740 dollars today, so that implies 25% to 30% upside.

In addition if you value the company based on take-out value,or private market value [i.e. the price that the company would be worth if it were purchased outright], you get a price of between $1200 and $1300 per share. That implies a 40% discount at today’s price.

What are the risks?

Continued decline in the newspaper business, with the advertising model under pressure, poses some risk.We do think that they’ve got a crown jewel business with the Washington Post, and the newspaper Web site is a growth vehicle for them. They’re finding that 83% of their American audience [on the Web site] comes from outside the local market. The Washington Post is a strong brand. It ranks third among newspaper Web sites and seventh among news Web sites generally. That’s a good business model and it’ll continue to evolve.

Another risk would be a slowdown in the education division. Any regulatory changes to do with the education business could also hurt them, because they’re reliant on a lot of federal funding to finance education. But current regulatory changes are actually working in their favor, so that’s not something to worry too much about.