Byrne's Blog

Why Did Barron’s Promote a Nonexistent Stock? ($WPO)

Barrons is a startlingly good magazine. The first year I subscribed, they panned Actrade, a stock I liked (it dropped 50% that day, and was bankrupt within the year), and touted M&F Worldwide, which is now five times higher.

So I tend to pay attention to them.

That Actrade story spoiled me, though. There was a lot of conjecture about the company’s fast growth and low cash flow, which I’d heard before. What was new was that company executives had bought their auditor a fancy Rolex; that’s what drove the stock down. Since then, I’ve paid much closer attention to the incentives people have to tell a story that doesn’t quite correspond with reality. And that’s why the recent Barrons article suggesting that the Washington Post Co. is 50% undervalued made me do a double-take.

The meat of the analysis is this: Yes, the newspaper itself is a bad business and getting worse. But the company’s other assets more than make up for it. In fact, their education division, Kaplan, is worth as much as the whole company!

That’s good news for Washington Post shareholders, but it’s great news for Kaplan executives:

The Post uses phantom Kaplan stock to compensate the division’s top executives. Based on the phantom stock price, Kaplan was valued at $2.8 billion at year end, below our $5 billion estimate. The Post’s value of Kaplan likely is understated, partly because the company has no incentive to assess Kaplan at a market price; that would force it to pay more to top Kaplan executives, who get the cash value of the phantom stock.

I can imagine a very simple explanation for this article: the senior people at Kaplan feel underpaid. They get fake stock at a low multiple, instead of real stock at a high multiple. Their division is keeping the company alive, but its growth is masked by the growing losses in Newsweek and the newspaper. They’re in the unlucky position of having stock in a growing company in a hot sector that could collapse at any moment—and not being able to sell because there isn’t a real market for their shares.

An article like this helps their case enormously. It gives them a reason to justify a spinoff, at best, and to expect a higher valuation in their internal stock, at worst. I could only find one executive, CFO Hal Jones, with Kaplan phantom stock. But even with the Post‘s fairly low executive compensation, there are executives with million-dollar restricted stock grants. If just one Kaplan executive got such a bonus in Kaplan stock, and this article caused that stock to be valued correctly, it’s a multi million-dollar windfall for the lucky Kaplan executives. All this from Barron’s recommending a stock that doesn’t exist!