We recently upgraded our recommendation on the diversified media and education firm, The Washington Post Company (WPO), to Neutral with a price target of $380.00 following its impressive third-quarter 2012 results. Earlier, we had an Underperform view on the stock.
The Washington Post Company’s third-quarter 2012 earnings from continuing operations came in at $6.79 per share, up approximately 31% from $5.18 earned in the prior-year quarter reflecting strength across Television Broadcasting and Cable Television divisions.
Television Broadcasting revenue surged 44% to $106.4 million during the quarter, whereas operating income more than doubled to $54.1 million, attributable to healthy advertising demand.
Cable Television division’s revenue rose 6% to $199.6 million. The division benefited from revenue growth registered across Internet and telephone service revenues, but was offset by higher promotional discounts and fall in basic video subscribers’ base. The division’s operating income jumped 8% to $39.9 million attributable to higher revenue.
However, what still compels us to be on the sidelines is the sluggish performance of the Education and Newspaper Publishing divisions.
The U.S. publishing industry has long been grappling with sinking advertising revenue, and the lingering macro concerns have further worsened the situation. The company’s Newspaper Publishing segment marked a decline of 4% during the quarter as print advertising fell 11% during the period. The division’s operating loss widened to $21.8 million from a loss of $10.8 million witnessed in the prior-year quarter.
Going forward, we believe that advertising volumes at its print division is likely to remain under pressure as advertisers are exhibiting reluctance in making any upfront commitments in an economy which has still not completely awakened from a state of hibernation.
Adding to the worries is the declining revenue at its education division, which slumped 8% to $552.6 million, reflecting a 17% fall in Higher Education revenue partially mitigated by a 2% increase in Test Preparation revenue and a 3% rise in Kaplan International revenue. The Education division saw operating income of $14.7 million, a sharp decline from $20.8 million in the prior-year quarter. Total student enrollment fell 8% year over year.
The above analysis supports our unbiased view on the stock. Moreover, The Washington Post Company, which faces stiff competition from The New York Times Company (NYT), holds a Zacks #3 Rank that translates into a short-term “Hold” rating.
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