Graham Holdings Rises 65%, Hold On For More Gains

We believe Graham Holdings Co stock (NYSE: GHC) may be a good opportunity at the present time. Graham Holdings Co is a diversified education and media company whose operations include educational services; television broadcasting; online, print and local TV news; home health and hospice care; and manufacturing. GHC stock trades at $465 currently and is, in fact, down 27% so far this year. It traded at $538 in February 2020 – just before the outbreak of coronavirus – and is currently 14% below that level as well. However, GHC stock has recovered over 65% from its March lows, similar to the broader market, following stimulus measures and gradual lifting of lockdowns. As the education industry gets back on track and manufacturing activity recovers, we believe that the stock has the potential for another 20% from here to surpass its pre-Covid levels of February 2020. Our conclusion is based on our comparative analysis of GHC stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 66% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how GHC stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

GHC and S&P 500 Performance Over 2007-08 Financial Crisis

We see GHC stock declined from levels of around $493 in September 2007 (pre-crisis peak) to levels of around $218 in March 2009 (as the markets bottomed out), implying GHC stock lost 56% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $266 in early 2010, rising by 22% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

GHC Fundamentals Over Recent Years

GHC revenues increased from $2.5 billion in 2016 to $2.9 billion in 2019, primarily due to higher revenue from manufacturing, television broadcasting, and other businesses such as restaurants. Along with higher revenue, earnings also increased from $29.95 to $61.70 during this period. However, the company’s revenues declined 3.1% y-o-y in the first nine months of 2020 while earnings more than halved, with business being impacted by the ongoing pandemic.

Does GHC Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

GHC’s total debt increased from $492 million in 2016 to $515 million in Q3 2020, while its total cash decreased from around $649 million to $296 million over the same period. However, the company generated over $240 million cash from operations in the first nine months of 2020. Strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Graham Holdings Company stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest. As the lockdowns are gradually lifted, the turnaround in manufacturing activity and other segments will drive revenue and earnings growth in 2021. This is likely to lead to another 20% rally in GHC stock from its current level.

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