How Warren Buffett valued Washington Post Company

Washington Post Company (WPC)

1973: 
Total Market cap $ 80 million.
Most security analysts, media brokers, and media executives estimated WPC's intrinsic value at $400 to $500 million.


Here was Buffett's reasoning.

1. Owner's earnings for that year:
Owner's earnings =
net income $13.3 million
+ depreciation & amortisation $3.7 million
- capital expenditure $ 6.6 million

Owner earnings = $10.4 million

Long-term U.S. government bond yield 6.81%.

The value of WPC = $10.4 / 6.81% = $ 152.7 million; this is almost twice the market value of the company but well short of Buffett's estimate.


Buffett's further reasoned that:

Over time, the capital expenditures of a newspaper = depreciation and amortization charges.

Therefore, net income = approximately to owner earnings.

Knowing this, the value of WPC
= net income / risk-free rate
= $ 13.3 million / 6.81%
= $ 195 million.


His other assumptions:

1. The increase in owner earnings will equal the rise of inflation.
2. However, newspapers in the 1970s have unusual pricing power; because most are monopolies in their community, they can raise their prices at rates higher than inflation.
3. If it is assumed that WPC has the ability to raise real prices by 3%, the value of the company is
= net income / (risk-free rate - 3%)
= $ 13.3 million / (6.81% - 3%)
= about $ 350 million.
4. WPC's pretax margins were 10%, which were below its 15% historical average margins. If pretax margins improved to 15%, the present value of the company would increase by $135 million, bringing the total intrinsic value to $ 485 million.



Buffett bought WPC at an attractive price.

Market cap $ 80 million.

Based on the above calculations, Buffett bought the WPC for at least half of its intrinsic value.

However, Buffett maintained that he bought the company at less than one-quarter of its value.

Either way, he clearly bought the company at a significant discount to its present value.

Buffett satisfied Ben Graham's premise that buying at a discount creates a margin of safety.

How to Make Money The Buffett Way

http://www.equitymaster.com/ptmail/sep09/buffet_newsubs.html

Stop wasting so much time and energy trying to find 'that' perfect stock. Instead discover...





How to Make Money
The Buffett Way
Simply put, we will be identifying companies that are doing simple businesses that can be easily understood, have consistent earnings history and sustainable growth path, are managed by honest and competent people, and whose stocks are available at attractive prices with an adequate margin of safety. 
After all, Buffett has made his entire fortune - US$ 37 bn at last count - following these very principles of investing.

And he's achieved tremendous success with not one, not two, but several stocks that have multiplied several times over a number of years. 
Like his investment in Coca-Cola, where every 100 dollars he invested in 1988 now stands at nearly 1,500 dollars...or simply put, an investment that has multiplied 15 times in around 21 years! See this...


Data Source: Yahoo Finance
Among other reasons, the key factor that prompted Buffett to buy Coca-Cola (as he later clarified) was that he believed in the simplicity and sustainability of its business.
But before that...

You know, the 15 times return on Coca-Cola is just among the lesser returns that Buffett has made over the years. Washington Post, the newspaper company that he started acquiring in 1973, has till date multiplied his money a whopping 81 times! And this is keeping out the significant dividends that the company has paid out over these years.


Data Source: Yahoo Finance
As per the reasoning he later offered, Buffett bought Washington Post simply because the company, apart from doing good business, was selling at a much lower price than its true business value.

'The Value Investor' will emulate Buffett's mantra of buying stocks when they are selling cheap as compared to their true worth.

Another of Buffett's investments that turned extremely successful was 'Gillette', the shaving products major. Buffett's simple reasoning to buy Gillette can be summed up in his own words - "I go to sleep in peace every night realising that every morning when I wake up, millions of men will wake up with me and shave."

Not to mention that Buffett multiplied his investment in Gillette almost 9 times in 14 years.

So How Can Buffett's Teachings Help You Build A Portfolio
That Can Multiply Your Wealth Several Times
Over The Next Five To Ten Years?
Now For Your Biggest Question...
"Why Should I Do This?"
Okay, let us put it the other way - what could be the opportunity loss for you for not practicing 'The Value Investor' strategy and otherwise following the herd?

See this chart...


Data Source: Berkshire Hathaway's 2008 annual report
The above chart depicts the increase in book value per share of Buffett's company Berkshire Hathaway vis-à-vis the performance of S&P 500 during the period 1964 to 2008.

While the S&P 500 multiplied by around 42 times during this period, Berkshire's book value multiplied 3,400 times!