I have lived in Marin County, possibly America’s preeminent left wing enclave, for over two decades. Marin residents are old (and getting older), white, and vote heavily Democratic. They overwhelmingly embrace abortion rights, drug rights, and gay rights. Church attendance is extremely low; mind-altering pharmaceutical drug use and therapist attendance is extremely high. The cult of self is Marin’s dominant religion.
And outside of Greenwich, Connecticut there are probably more money managers, per capita, in Marin than anywhere else in America. Marin’s attitudes are not unique. The investment community and the media/cultural elites on both coasts share a suspicion (or dislike?) of religious, socially conservative Americans. That might explain why companies that cater to the values of Red State residents are poorly understood, poorly followed, and often undervalued by the stock market. Camarillo, California-headquartered Salem Media (NASDAQ:SALM) and Phoenix-headquartered Grand Canyon College (NASDAQ:LOPE) are two such companies.
I have owned LOPE stock for over three years (and written about it several times over that time period). Salem is a newer position in my fund. Despite boasting a $2 billion market cap, LOPE is only followed by a handful of Wall Street analysts. A single lone analyst, from the obscure firm Noble Financial, follows Salem Media. I recently drove to Camarillo to interview Salem’s chief financial officer. The company operates 116 radio stations across America. Almost half have a Christian teaching or Christian music format; the other stations feature conservative news and business talk. Of Salem’s $266M 2015 revenues, over 75 percent came from advertising on these stations. Other businesses include digital media websites and publishing.
Salem generated 2015 ebitda of $52M, or $2/share; yet Salem’s share price is $6, below its 52-week high of $7 (and way below Salem’s 1999 $22.50 IPO price). Many investors are no doubt spooked by Salem’s $277M debt, much of which was obtained to buy radio stations. While ebitda and cash flow will grow in 2016 and 2017, management stated that its near term priority is to pay down its debt load—probably $20–25M each year—so the company will likely not raise its healthy dividend of .26 cents a share, which yields 5 percent annually, for awhile. Salem acquired 12 radio station in 2015, which will help revenues grow 6-10 percent in 2016 and beyond, and over the long term, management is committed to distributing 20 percent of free cash flow to shareholders. Grand Canyon University is a Christian, nondenominational school, with 15,000 full time ground students and another 55,000 online students.
Management is confident that it will grow enrollment to 25,000 ground students by 2018. I flew to Phoenix last month and spent an hour with the company’s chief financial officer at its bustling 200-acre campus. I’ve been bullish on LOPE for years now, but the story keeps getting better and better. On metrics the government uses to measure universities—cohort default, gainful employment, etc.– LOPE is in the top half of all US schools and is near the top of all for-profit colleges. Most impressively, despite the fact the average LOPE ground student pays slightly less than $16,000/year for tuition, room and board (versus a mid-twenty thousand sum for most of the UC and Cal States colleges), LOPE earns an operating profit margin of nearly thirty percent.
LOPE’s stock has traded sideways since 2013, as many other for profit schools— most of which are scammy diploma mills—have seen their stocks drop 50-80 percent. Recently the company’s accreditation agency rejected Grand Canyon’s desire to morph its campus operations to nonprofit status, with a for-profit public shell managing the nonprofit university. This ruling may not be bad for shareholders. GCU will produce almost $300M in 2016 ebitda, or over $6/share, and its earnings per share should exceed $3/share, up from $2.78 in 2015. The stock closed at $42 yesterday. There are almost 100M self-described born again and/or evangelical Christians in America. I don’t believe coastal elites in this country fully comprehend this scale. Christians represent a large, and more importantly growing, percent of the total US population. Companies that cater to these consumers should continue to benefit from this secular trend.