Graham Holdings Company

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Graham Holdings Company is a diversified holding company with operations spanning education, television broadcasting, manufacturing, healthcare, and other businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

GHC’s Moat: 3/5. GHC does possess certain advantages which can be considered as a moat, even though it is not a very strong or wide moat due to the very competitive industries it operates in. GHC, at its current state, relies on its brand reputation, expertise, and long-standing relations with clients, customers and suppliers. I am rating it a 3 on the basis of being a collection of high-quality established businesses and not very wide moats.

  • Education Division: Kaplan’s strong reputation and brand in the education sector provides some degree of customer loyalty and limits the easy entry of new competitors.
  • Television Broadcasting: Established relationships between its broadcast stations and advertising agencies, and a significant regulatory burden (which might be a disadvantage) makes it tough for competitors to enter.
  • Manufacturing & Automotive: The manufacturing division and its automotive dealerships benefit from existing relationships and scale, which can take time and investment for competitors to replicate. This can also be an entry barrier for newcomers.
  • Healthcare: GHC’s healthcare businesses, notably home health and hospice, enjoy strong referral sources and recurring revenue, both of which lead to some stability in income.

Legitimate Risks to Moat & Business Resilience: While GHC has several valuable assets, it is not without significant risks that can potentially harm its moat:

  • Regulatory Changes: GHC faces changing rules and regulations in many of its businesses: the education, healthcare, and broadcasting segments are very susceptible to regulatory changes. Changes in legislation could influence its operations, compliance costs, and competitiveness, potentially weakening the moat.
  • Industry Disruption: Technology, especially internet technology, is an important risk. The educational segment could be disrupted by online learning platforms and the television segment could be disrupted by new broadcasting platforms and streaming services.
  • Competitive Pressure: The industries GHC operates in are highly competitive, which creates price pressures and threatens the moat. The company has no pricing power, and the only power it has is through lowering prices or by offering better products, services, and customer service, all of which can be easily replicated by competitors.
  • Financial Risk A global economic recession can significantly reduce demand in all of GHC’s operations and also bring further liquidity issues and higher interest rates. It also has a high debt load, that puts it at additional risks from interest rates and debt.

  • Acquisition Risk: Although the management have managed to acquire businesses with great success over time, the acquisitions could fail to produce the synergistic benefits and lead to losses, thus impacting the company’s growth.

  • Business Resilience: GHC displays considerable resilience through the diversification of its operations into varied industries, which helps to reduce its dependence on one industry. GHC has had a solid operational history, and strong cash flow. It also has the backing of the Graham family, who are one of the most successful investors in history.

Detailed Business Explanation:

  • Revenue Distribution: Graham Holdings operates in a diverse array of sectors:
    • Education: The Kaplan segment, which provides educational programs and test preparation services to various institutions. There is a good degree of scalability here. It also provides courses online and through 3rd party education providers. Also, they have been investing in the certification market, which is extremely competitive.
    • Television Broadcasting: Operates several broadcast stations in various states. The FCC’s control and their ability to put up a challenge through the renewal licenses creates some barriers to entry.
    • Manufacturing: Includes the production of composite materials, wire harness and cable assemblies for various industries. Highly competitive as well, with no clear differentiator or strong moat.
    • Healthcare: Provides home health, hospice, and medical services with the focus of helping people lead independent and healthy lives. Not too different from what competitors are doing and does not create a moat. It is highly regulated too.
    • Other Businesses: Includes online publishing, digital marketing, data and analytics, among others. No meaningful moat and highly competitive.
  • Industry Trends: The company operates in numerous industries that are facing different trends. Education is experiencing massive technological disruption through online learning platforms. Healthcare is facing increasing regulatory scrutiny and budget constraints. Broadcasting is facing cord-cutting and a decline in advertising revenues, along with competition from new streaming services. Manufacturing is undergoing the effects of globalization, and increase in costs, and also is subject to economic swings.
  • Margins: The margins vary considerably among business segments. Generally, its businesses have faced price pressures from competitions, but have managed to maintain good margins through higher productivity, cost controls and efficient supply-chain management.
  • Competitive Landscape: GHC operates in many highly competitive landscapes. These include educational services, where numerous public and private institutions compete. The broadcast sector is also highly competitive because of multiple stations and streaming services. The healthcare and manufacturing divisions are likewise highly competitive.
  • What Makes GHC Different? The diversity of its operations gives some advantages to the company. As well as that, the company is able to leverage the knowledge and resources in different segments, thus providing some diversification. The management’s expertise in spotting and acquiring great businesses is another great factor, which also provides some additional stability. Finally, being managed by the Graham family is a strong plus.

Financial Analysis Here’s a breakdown of Graham Holding’s financial state:

  • Profitability: GHC’s profits have fluctuated quite a bit across different segments, due to external and internal factors, such as economic conditions and acquisitions.
    • They made 207 million in net income in 2022, but lost 21 million in 2023.
    • The 2023 losses were driven due to losses in investments and poor results in their education division.
    • Their net income was roughly $100 million in 2021.
    • Their total net profit has varied a lot from year to year and from quarter to quarter due to the nature of their business model.
  • Cash Flows: The company’s cash flow from operations is positive, and consistently provides a good base of earnings for the company.
  • Balance Sheet: They have total assets worth over 7.9 Billion dollars, while their liabilities also amount to 3.9 billion.
    • Long term debt currently stands at approximately 745 Million and is subject to interest rate risk.
    • GHC has a good amount of cash, at $130 million, which provides liquidity.
    • They also have substantial investments in marketable equity securities at roughly $710 million.
    • They have $1.9 billion of goodwill and other intangibles as well.
  • Debt: GHC’s debt is substantial, but it has not been growing rapidly over time and GHC has a history of paying back its debt. However, their debts are also subject to some interest rate risks.
  • Recent Concerns: GHC reported a net loss of $21 million in 2023, while net income was $207 million in 2022. This drop was primarily due to decline in their education sector as well as lower returns on investments. Management cited in their most recent reports that they are aiming for higher operational efficiency and improved market access in this segment for higher profitability in the coming years.

Understandability Rating: 4/5 GHC’s business model is relatively simple to understand but it has many moving parts to it, since it is a holding company that has different operations. It requires some effort to comprehend how each division works.

  • Strengths: While it does involve many segments, the core businesses are relatively easy to understand. The financial statements themselves are quite straightforward and easy to analyse.
  • Weaknesses: The company operates in different industries, making the company very diverse and difficult to follow. Also, the accounting relating to all these acquisitions can be difficult to understand.

Balance Sheet Health: 4/5 GHC has a decent balance sheet and an acceptable debt level.

  • Strengths: GHC maintains a reasonable amount of cash and current assets. Also, they have a history of positive cash flows, and they have been successful at investing that into value creating projects.
  • Weaknesses: It has a considerable amount of debt, and is also affected by fluctuating interest rates. They also have a large amount of goodwill and intangible assets.