Monday, August 16, 2010

So you think you are a contrarian?

Under-appreciated statistics on contrarians

1) 98% of contrarians at the Pamplona "running of the bulls" get run-over
2) 98% of people view themselves as having a unique and insightful opinions, when in fact it was simply derived from another commentator (i.e- Fox news, network media, blogs)

That being said, we here at are ready to boldly assert we are considering a true "contrarian" play. Namely, we are looking at several stocks in the disgusting for-profit education sector. Congress is concerned about education quality and rapid-growth of for-profit schools, which tend to leech off of federal student loan programs. In particular, our efforts are focused on the least-liked names in the least-liked sector of the market:

1. COCO- Corinthian Colleges: $5.23 last trade, valued at 1/3rd of TTM sales, 1.9x Ebitda, or 3.2x earnings . The stock is down 75% since April 2010 (past 4 months) and trades at a market capitalization of $460Mln.

Ironically, COCO paid nearly $400Mln cash to acquire a higher-quality college chain (Heald) in 2010. Had they saved their money, they would be trading at/near their cash position on the balance sheet. The entire value of COCO appears to be comprised of Heald College and the 17% of revenue derived from Canada. There appears to be little value placed on the bulk of COCO's principal business unit "Everest College". Most of COCO's revenue comes from vocational programs (auto tech, etc) or 2-year associates degrees.

Washington Post owns 9% of COCO stock and my belief is this company is likely to receive a private-equity or third-party bid for the company. It is difficult to estimate what impact government efforts to limit Federal student loans will have, but I do not believe it will destroy this company (although it could cause sales/earnings to take a hit).

2. WPO- Washington Post: $318 last trade, valued at .48x sales, 2.9x ebitda, 10x earnings. WaPo is down 44% from its April peak ($2.3Bln enterprise value), following a Barron's analysis that WaPo "is the most undervalued stock in the entire media sector". If the statement was remotely true in April, then it is even more so today!

Interestingly, WaPo generates earnings from multiple segments outside of for-profit education. It owns a number of cable-tv monopolies that generated nearly $300Mln Ebitda, which at a 7x multiple= $2.1Bln valuation. The company also owns its namesake newspaper and broadcast tv stations which are worth between $500Mln-$1Bln. On top of this, it had more than $1Bln cash on its balance sheet ($600Mln net of debt outstanding).

Essentially, WaPo is trading at a 13% discount to fair value, entirely ignoring the value of its Kaplan education division ($2.3Bln enterprise value vs. $2.6Bln estimated value of non-education businesses). So, any valuation assigned to WaPo's education segment is "gravy", as some might say. Considering that the education segment generated $377mln EBITDA over the past twelve months, it is clearly WORTH SOMETHING, even if its business activity is viewed in a low-light. If we assign a distressed EBITDA multiple of 2-3x, that segment should be valued between $750-1.1Bln.

So, combining our $2.6Bln base-line value for non-education segments of WaPo with our $750Mln base-line value for WaPo's Kaplan segment, our estimate of enterprise value increases to $3.35Bln. This valuation equates to $507 per share and represents 60% upside to the current stock price. Warren Buffett owns nearly 20% of WaPo, although its unclear if he has any interest in buying more.

Key potential catalysts that drive our "contrarian" spirit:
1) Stocks are significantly oversold within a very short time-frame

2) Both businesses have segments that are "high-quality" or immune from proposed federal legislation on "gainful employment", as it pertains to eligibility to issue Title IV student loans.

3) The value of the higher-quality, "immune" businesses exceeds the current market valuation on COCO/WPO stock

4) Federal legislation on gainful employment will not occur until AFTER upcoming 2010 congressional elections. If Democrats lose control of Congress, I believe odds of current legislation being passed decrease significantly.

5)As currently written, the new student-loan requirements are specifically designed to exclude poor, highly levered minorities. In particular, the bill will effectively shut-out those minorities with low-paying jobs and difficulty with reading/higher math. Curiously, Democrats want to spend hundreds of billions putting subprime borrowers into homes, but now want to curtail loans designed to educate those same subprime borrowers (giving them a shot at higher-paying jobs)?

6) One other potential catalyst is that for-profit schools underwrite their own loans and become a hybrid teacher/student-loan company. Interest rates would have to rise, defaults would be problematic, but in such a scenario the core business survives

7) Costs at for-profit schools rise less than non-profits. Most non-profits are focused on expanding their campuses and building giant altars to the football-gods (massive stadiums) or their own hubris. As such, for-profit schools will be better able to manage flat/negative growth in tuition rates than non-profits.

8) It is unlikely that any politician passes a bill that bankrupts the for-profit schools overnight. Take Corinthian as an example. Their student enrollment is currently 110,000 students. They have been around since 1995, which means more than 1,000,000 students would have worthless degrees thanks to a legislative effort by Congress. How will an out-of-work constituent feel to re-write their work resume' and remove their education credentials? How would that make them vote?

No comments: