The One Warren Buffett Stock You Have to Own

When people look at Warren Buffett’s portfolio, they typically want to own the latest stocks he’s been in, and they neglect the older guys. They want to know if Wells Fargo (WFC) or U.S. Bancorp (USB) are the right financials to own. Or if Johnson & Johnson (JNJ) is the right health care stock.

But there is a hidden gem in the older stocks.

First off, let's summarize Buffett's most-recent picks, then find the growth stock that is buried in one of his original value plays.

In Buffett’s most recent filing, he added to his Wells Fargo position. Wells Fargo had been crushed along with the other banks in the subprime mess, but it is probably one of the few banks to have limited subprime exposure early on. The bank is now 50% higher than its recent lows, and while it probably is a buy (particularly with its solid 4.5% dividend), there are better picks among Buffett’s stocks.

Buffett also bought 3 million shares of his favorite railroad play, Burlington Northern Santa Fe (BNI). If you have been following his portfolio closely, you had the opportunity to pick up Burlington a year ago at prices lower than Buffett paid, in the low $70s. But with the stock at $102, I’d stay away for the moment, although, again, it's probably still a long-term buy.

However, the long-term pick that Buffett owns that I think is an enormous buy right now is Washington Post (WPO). What!? Isn’t the newspaper industry dead? Doesn’t Craigslist (30% owned by eBay (EBAY)) dominate the classifieds space? Isn’t everyone advertising on Google (GOOG) now or getting the news from AOL (Time Warner (TWX))?

Oh, did we mention that Washington Post is not really a newspaper company? Quick, before reading further, guess where more than 50% of its revenues come from and almost all of its EBITDA? If you guessed the education segment of its business (built off of its Stanley Kaplan acquisition), then you’d be correct.

First off, for the first time in years, the company reported a net income loss due to its retirement program at the newspaper. However, overall revenue was up 6% to $1.106 billion due to “significant revenue growth at the education and cable television divisions.” Revenues were down at the newspaper, magazine and television divisions.

Specifically, the education division revenue was $576 million for second-quarter 2008, up 14% over the same period in 2007. Stanley Kaplan reported income of $47.4 million, up 26% from the $37.5 million recorded in second-quarter 2007. For the past six months, Kaplan had net income of $94 million, up 31% from the year-ago period.

Let's just annualize that to about $200 million in income expected from the education group. Now let's slap a multiple similar to other education companies. Apollo Group (APOL), for instance, has a P/E ratio of 30. That would give the education segment at Washington Post a market cap value of $6 billion were it to be on its own.

The market cap of Washington Post is currently $6 billion.

Which means buying stock in Washington Post gives you The Washington Post, Newsweek, the cable and television business and the Internet business, all for free. I admit that the newspaper industry is struggling. But the brand-name leaders (The Wall Street Journal, which was acquired by News Corp. (NWS); the New York Times; USA Today) will find a way to survive and, worst case, will be sold. Even in a fire sale, The Washington Post would get a value greater than zero.

The cable television business is showing some growth and is profitable ($40 million in operating income in the second quarter.) Annualize that and slap a multiple similar to that of Time Warner Cable (a 26 P/E), and you get $4160 million.

So we are still valuing the entire newspaper and magazine business at zero, and a sum of the parts shows the potential stock at 66% higher than where it currently is.

Value Washington Post wherever you want. It’s a great newspaper, and I highly recommend Katherine Graham’s memoirs to see her experiences of building the paper during the difficult times in the '60s and '70s and when she first met the young Warren Buffett.

Gannett (GCI) and New York Times (NYT) are valued at about a half to two-thirds times sales. That might value the Post newspaper (plus Newsweek) at about $500 million to $660 million.

Well, whatever. It's yours for free now at the current price of Washington Post.
Source: http://www.stockpickr.com