Assessing Graham Holdings (GHC) Valuation After Expansion In Healthcare And Education

Event driven snapshot on Graham Holdings (GHC)

Recent news around Graham Holdings (GHC) centers on expansion in healthcare and education, including the acquisition of Covenant Home Health in Eastern Pennsylvania and new program partnerships through its Kaplan subsidiary.

See our latest analysis for Graham Holdings.

Recent earnings and impairment charges, along with the confirmed dividend, have come alongside a 1-year total shareholder return of 18.24%. A 30-day share price return of a 7.73% decline suggests momentum has cooled in the short term compared with stronger multi year total shareholder returns.

If Graham Holdings has you thinking about where else capital might work hard for you, now could be a good time to check out 19 top founder-led companies as potential long term compounders.

With Graham Holdings trading at US$1,068.72 against a US$995 analyst target and an indicated intrinsic discount of about 60%, is the recent share price weakness a window of opportunity, or is the market already pricing in its future growth?

Price-to-Earnings of 16x: Is it justified?

On a P/E of 16x, Graham Holdings sits below both its direct peers on 18.2x and the wider US Consumer Services industry on 17.7x, even after a strong multi year return profile.

The P/E ratio compares the current share price to earnings per share and gives you a quick read on how much investors are paying for each dollar of profit. For a diversified holding company like Graham Holdings, which spans education, media, healthcare and industrial businesses, P/E can help you weigh the mix of steady cash generative units against segments where earnings are more volatile.

With the shares trading at a discount to the peer and industry averages, the market appears to be putting a lower price on Graham Holdings' current earnings, despite 10.5% annual earnings growth over the past 5 years and a 1 year total shareholder return that matched the broader US market and beat the Consumer Services industry. That gap is what many investors will focus on when weighing the recent pullback.

Compared to the US Consumer Services industry average P/E of 17.7x, Graham Holdings' 16x multiple is meaningfully lower. This points to a more conservative earnings valuation even after adjusting for the recent negative earnings growth and the impact of one off items on reported profit.

See what the numbers say about this price — find out in our valuation breakdown.

Result: Price-to-Earnings of 16x (UNDERVALUED)

However, you still have to weigh the recent 7.7% 30 day share price decline, and the analyst price target below the current US$1,068.72, as potential warning signs.

Find out about the key risks to this Graham Holdings narrative.

Another view using our DCF model

While a 16x P/E suggests Graham Holdings is modestly priced next to peers, our DCF model points to something very different. With the shares at $1,068.72 versus an estimated fair value of $2,657.05, the stock screens as heavily undervalued on cash flows. Which lens do you trust more for a long term evaluation?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Graham Holdings for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 50 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With a mix of potential upside and clear risk flags in the story so far, it makes sense to move quickly and check the data for yourself. To help you weigh both sides with a cool head, take a look at 1 key reward and 2 important warning signs and decide how the balance of risk and reward sits for you.

Looking for more investment ideas?

If you stop with just one company here, you might miss other opportunities that better match your goals, risk comfort, and income needs, so keep going.

• Target potential mispricing by scanning our list of 50 high quality undervalued stocks that pair quality fundamentals with lower market expectations.
• Lock in the possibility of steadier income streams by reviewing 16 dividend fortresses that focus on stronger yield profiles.
• Prioritise resilience by checking out 66 resilient stocks with low risk scores that score well on financial strength and volatility checks.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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