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We have downgraded our recommendation on the diversified media and education firm, The Washington Post Company from Neutral to Underperform following its disappointing second-quarter 2012 results.

The company’s second-quarter 2012 earnings from continuing operations came in at $5.38 per share, sliding approximately 22% from $6.88 earned in the prior-year quarter. Moreover, revenue for the quarter dropped 5% to $1,006.9 million from the prior-year period, as slump in the students’ enrollment and soft advertising demand continue to deter the profitability of the company.

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 7% during the quarter as print advertising fell 15% during the period. The division’s operating loss widened to $15.9 million from a loss of $2.9 million witnessed in the prior-year quarter.

Adding to the pain is the declining revenues at its education division, which went down 9% to $558.4 million, reflecting a 19% fall in Higher Education revenue, a dip of 4% in Test Preparation revenue, and a 6% decline in Kaplan Ventures revenue. The education division saw operating income of $3.4 million, a sharp decline from $21.5 million 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.

Moreover, its Kaplan Higher Education segment faces stiff competition from other from traditional colleges as well as other for-profit schools. Further, the company’s cable television system faces intense competition from other forms of video program delivery systems, including DBS services, telephone companies and the Internet. This may dent the company’s top and bottom lines performance.

Currently, The Washington Post Company, which faces stiff competition from The New York Times Company (NYT - Analyst Report), holds a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

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