New Frontier Media Takes The Lead From Playboy In Adult Oriented TV

New Frontier Media (NOOF) is in the adult entertainment media business. It has three different segments that provide products for that market. First, it has a Pay TV Group which distributes adult TV to cable and satellite companies through pay-per-view and video-on-demand. This is the biggest segment and a majority of the revenues come from the Pay TV Group.

It also has the Film Production Group which produces original adult themed movies and is a sales agency that helps independent filmmakers license their product; it was acquired in February of 2006. Its third segment is the Internet Group which distributes adult content through the internet.

It recently had earnings in early June and missed analyst estimates, sending the stock down. The big contributor to the earnings drop was an increase of 43% in operating expenses. Organic revenue growth, not taking into account the Film Production Group acquisition, was negative compared to the same quarter last year.

Industry

Its primary competitor in the Adult Entertainment TV industry is Playboy (PLA) and to a minor degree Hustler and Playgirl. It does face competition from other sorts of erotic material such as adult video/dvd rentals, adult books and magazines, telephone adult chat lines and other adult oriented services. Kagan Research LLC predicts that the adult pay-per-view and video on demand market will grow to $1.4 billion in 2014. The last recorded figure for this was 2004 when it was $761 million.

The adult entertainment industry on the internet is ultra competitive and websites are constantly competing with each other for new members. The Film group competes with other adult video producers like Girls Gone Wild and Jerry Springer Uncensored. The sales agency competes with other similar companies.

Company

There has been a very positive development in the TV segment in that Playboy is struggling with its adult entertainment TV, creating a big opportunity for New Frontier Media to increase its penetration to more households. The big advantage that its TV has over Playboy’s is that it offers a wide variety of adult content from a lot of different independent producers. It does not use its own movies, giving its TV channels an edge over Playboy’s. Its TV channels are the market leaders in adult oriented TV.

Its revenues have been growing at a very slow rate as of late; it actually had negative organic growth in Fiscal 2006, which is of concern. Its revenue growth rate over the past 4 years has been just under 8%. It has growth initiatives for this year such as its launch of a video-on-demand service for a New York City cable TV operator that has 3.1 million basic cable subscribers.

Valuation

NOOF is currently trading at a trailing price/earnings ratio of 16.93 and a forward price/earnings ratio for Fiscal 2009 of 13.79. It has $26 million of cash and cash equivalents and no debt. It pays a hefty dividend of 50 cents a year, which is a yield of about 6%, and it is sustainable due to the strength of its free cash flows. If just to assume that NOOF is a never-ending stream of $.50 yearly payments, the stock is worth about $10 at today’s interest rates. Its cash flow from operations has been higher than its Net Income for each of the past 3 years, attesting to the quality of its earnings and the strength of its cash flows. About 7% of the company is owned by insiders. Its ROE has not been exceptional with a 5 year average of 10.9%. NOOF was a top 25 magic formula stock for companies over $100m on 7/15/2007.

Technicals

NOOF had a significant run up in 2003 and most recently it has been trading in a range between $6 and $10 a share. It has been holding support at $8.5 for all of 2007. Volume recently has been relatively low. It has been in a down trend since around the start of 2007 and that has been carrying the stock down. The P/E ratio is in the middle of its trading range over the past 3.5 years.

Conclusion

I think at the P/E NOOF is trading, it is close to fair value since the growth prospects it's offering are not too exciting. However, during a recessionary environment, NOOF would be a great holding because of the stability and the 6% dividend it offers.

Disclosure: I don’t have a position in NOOF.