Graham Holdings (NYSE: GHC) isn't exactly a household name among investors, but the company is best known for two things: having formerly owned The Washington Post, and being the corporate parent of the entities that manage the Kaplan education business. For a long time, Kaplan has been the main driver of Graham's overall results, and challenges in the for-profit education segment have weighed on the unit. Yet what many people don't know is that Graham has some other businesses under its corporate umbrella, and sometimes, they do the hard lifting to keep the company's prospects looking good.
Coming into Wednesday's first-quarter financial report, most investors in Graham Holdings had their eyes squarely focused on Kaplan. However, the biggest boost to performance came from an entirely different quarter, and although one-time factors played a key role, shareholders would be smart to keep an eye on Graham's other businesses going forward.
Image source: Kaplan.
A nod to South Korea
Graham's first-quarter numbers were strong. Sales climbed 13% to $659.4 million, nearly doubling the pace of revenue growth that Graham posted during the fourth quarter of 2017. GAAP net income more than doubled to $42.9 million, and that didn't even include some extraordinary items that caused adjusted earnings to more than triple from year-ago levels to $9.04 per share.
The first place many investors would look for growth is from Kaplan, and it did its part during the quarter. Revenue for the education division was up just 1%, although operating income did more than double to $22.7 million. Within the unit, higher education remained the key drag, with revenue falling 10% and operating income dropping by nearly half. Test prep and professional instruction in the U.S. had mixed results, but what saved the unit was a boom in the international education business. There, sales climbed 12%, and operating income nearly tripled, making up the lion's share of profitability for the education division overall.
But what many investors saw as a surprise was the strength in the television broadcasting segment. Revenue jumped 19%, lifting operating income by more than half from year-earlier levels. The primary reason came from the 2018 Winter Olympics, with related advertising at Graham's NBC affiliates benefits greatly from the two weeks of sports coverage from South Korea.
A big revenue contribution also came from the manufacturing segment. The company acquired Hoover Treated Wood Products about a year ago, and the near-doubling in segment sales came primarily from Hoover's contributions. Among Graham's other-business category, neither social media marketing specialist SocialCode nor the company's healthcare-related businesses made big contributions to overall growth.
What's ahead for Graham Holdings?
Most investors will continue to look at Kaplan as the most consistent part of Graham's business. The success of the international division looks poised to continue indefinitely, although macroeconomic conditions can play a part in how willing people are worldwide to pay for the education and training they need. The U.S. business has been more sluggish, and turnaround efforts haven't yet yielded the full results that investors would prefer to see.
For the television business, the Winter Olympics did a good job of producing advertising revenue to pull the company out of a slump in that area, but the key for the rest of 2018 will be how much money goes into political campaign advertising. As the midterm elections approach in November, there will be many hard-fought races, and Graham will hope that its affiliates will get at least their fair share of the spending.
Graham Holdings investors didn't have a major response to the results, and the stock has stayed relatively stable even with the strong performance. Graham's long-term prospects look much the same as they have for years, and it'll take bigger contributions from the smaller parts of the conglomerate in order to make a marked difference on total company success.
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