Sex May Sell, But Is It Profitable?

The old adage that sex sells may be true, but if an investor wanted to invest in publicly traded peddlers of sex (in all its legal incarnations), that investor would have only a few poor choices. While those choices may soon expand (when Penthouse goes public, as it is expected to do soon), the anti-prude investor should steer clear of this field.

The largest publicly-traded sex-related company, Playboy (PLA) [$8.69 0.00%, market cap: $289.1M], is the quintessential poor investment. Over the last two decades Playboy stock is only up 42%, while the Dow Jones Industrial Average is up 520%. Even as Hugh Heffner continues to cavort with silicone-enhanced playmates one-third his age, the company’s centerpiece magazine continues to lose subscribers.

The story is much the same at cable-smut purveyor New Frontier Media (NOOF) [$4.83 0.00%, market cap: $114.9M], where the stock has appreciated 2% over the last decade. The DJIA is up 64% over the same time period. The problem with cable porn is that it will suffer the same fate as newspapers: it is going to be crushed by internet competition. So despite a cheap P/E of 15, New Frontier will likely be a poor investment.

Rick’s Cabaret International (RICK) [$21.9301 0.00%, market cap: $165.7M], a chain of strip clubs (see a commercial for it here), has been kinder to its investors than the above companies. Over the last decade it has outperformed the DJIA, 270% to 64%. But Rick’s is trading now at a stratospheric P/E of 34, which is out of line with companies most comparable to it: staffing companies such as Administaff (ASF) [$24.70 0.00%, market cap: $640.5M], and Manpower (MAN) [$60.00 0.00%, market cap: $4.781B], both of which trade at P/E ratios under 15.

While Rick’s provides stripping services in branded locations, it is not really that different from staffing firms that provide administrative and other services to companies. It relies upon its ability to recruit skilled workers, and its brand is far less important than the actual capabilities of its workers. Also like the staffing firms, it is vulnerable to a recession.

The last public sex company of which I am aware is the worst, yet it comes with the most wholesome reputation. This company is Berman Center Inc. [BRMC.PK]. This is a sex therapy center and website that caters to couples looking to improve their sex lives. Its eponymous founder, Dr. Laura Berman, is not only knowledgeable but also good at getting press. She has appeared on Oprah Winfrey’s show and she is a columnist for the Chicago Sun-Times.

Despite the advantages the company has, its financials are a mess. The company, with a market capitalization of $12.5 million, has a book value of negative $1.3 million (see the most recent 10Q for details). The company lost $1.3 million over the first nine months of 2007, and lost $1.2 million over the first nine months of 2006. The company is also delinquent in filing its 2007 annual report.

Overall, sex makes for a poor investment, at least in terms of public companies.

Disclosure: I have no position in any stock mentioned.

Comments

[b3rkut]

Interesting that you say Rick's is vulnerable to a recession.

I would think that sex, gambling, alcohol and cigarette companies would do fairly well in recessions.

Why do you say otherwise?

[MicrocapSpeculator]

NOOF reported its highest quarterly revenues ever last quarter. So while there may be some logical appeal to your idea that the internet may "crush" these businesses, the facts point in the other direction.

[long_on_oil]

Ricks may be selling at a high pe based on past earnings but future earnings projections put the stock at a 20 pe. I'll bet there isn't a single investor that does not wish they had purchased Ricks 18 months ago at $8.38.

[anastos]

Comparing Rick's to Manpower or Administaff? Words fail me. The business models aren't even in the same area code, let alone same state. Last time I was in a Manpower office, they didn't offer me a steak, a martini and a table dance. I bought at 15, sold at 28 and bought some more recently back under 20. And, even if they go bust up, they own the real estate most of their clubs are in so there's some kind of underlying tangible asset that doesn't involve a g-string and pasties.

[brownsteve]

Ditto to the comments about valuation and peer grouping.

I've bought RICK at $3, $5, $8 and $20.

Another public company is Private Media (PRVT).

[goku]

Rich is a great stock for all the above mentioned reasons as well as one other big one: there are a lot of recent zoning law trends in big cities against strip clubs right as Rick is attempting a big expansion, but the company is doing so well, it has the cash/stock options to keep acquiring existing clubs (and the land they're on) to convert to their very sucessful model (a large % of the clubs are "no-touch", most all are bright, clean and serve good food) for this type of business. Recent pullbacks in the stock are mostly smart profit taking by those who got in under 10. Glad someone mentioned Private (PRVT); it is the Anti-Rick. The company does OK, but the owner, a vast majority owner, (legally) skims all the profit for himself leaving the reamining shareholders to feel like tennants in a building that hasn't had repairs for years, but where the landlord is always vacationing oin Hawaii. I shorted it at 3.50, it's in the mid 1's now. Let it die.

[zorro]

U R soooo wrong about NOOF....Too many funds in, stock worth $11 0r $12 EASY

[MichaelGoode]

@b3rkut -- so you think that strip clubs are as addictive as alcohol and cigarettes? I doubt that--in a recession people will trade down to cheaper options, like the internet.

The whole point about Rick's is that branding is not as useful to it as it is with Wal-Mart. Of course it is not like the staffing firms. But my bet is that it is just as vulnerable to a recession as they are. If I turn out to be wrong about Rick's the most likely reason would be that its management is better at dealing with regulation than its competitors. Regulation is one of the areas in which there are huge economies of scale (eg., having experienced lawyers on staff).

I will revisit these companies in the future and we will see who was right.

[Regicider]

Michael Goode, sure people may trade down in a recession from strip--I mean gentlemen's clubs to the internet. Did you know that RICK has an internet website component to its business model?

"Rick's Cabaret International also owns and operates adult entertainment Internet Web sites, including xxxPassword.com that features adult content; CouplesTouch.com, a personals site for those in the swinging lifestyle; and NaughtyBids.com, an online adult auction site that contains consumer-initiated auctions for items, such as adult videos, apparel, photo sets, adult paraphernalia, and other erotica."

You should do a bit of due diligence before writing a whole article on the happiest place in the world. And if you don't think that a set of real breasts aren't as addictive as booze and cigs, you obviously have never had a real (err...fake) pair shoved in your face. Once again, due diligence my friend.

[MichaelGoode]

Regicider -- the problem with the trading down is that none of Rick's online properties are dominant. Why would I go to CouplesTouch.com when I can go to Adult Friend Finder (although I wouldn't go to either). While I will admit to not having experienced the joys of strip clubbery, in a recession people will run out of money (strip clubs are expensive). People may not stop going but they will cut back, and that is what will kill profitability.

[anastos]

Then, by that same logic, we should start shorting gaming stocks because Vegas is going to shut down and all of those companies are going bust up. Then, we can short jewelry stores and car lots because trips to those are usually expensive. Why don't we ban ex-wives, while we're at it because, god knows, they're the most expensive yet useless item around.

While I respect your opinion to not visit these establishments, I feel the views you have provided here may be clouded by your own personal beliefs. I'm not saying these stocks are for everyone but you've written about an industry you have obvious disdain for and it shows.

[bobloblaw]

I don't think the peer-grouping of Rick's is reasonable enough to, say, publish or talk about. Employees are important to many firms, what then is the argument?

"If I turn out to be wrong about Rick's the most likely reason would be that its management is better at dealing with regulation than its competitors."

This space is wide-open. There are scores (no pun) of privately held clubs willing to sell for far less than ten times earnings. Also, that "stratospheric&qu... P/E is going to look a lot lower in four weeks when the next batch of earnings come out. Had you done a small amount of DD you would know this. Rick's management is very good and this is observable. Read the article in the New York Times after Rick's bought the paradise club (Published 1/21/2005) and see how things have changed. Rick's management also understand their legal environment as well as anyone -- this is necessary but not sufficient for success.

The next large acquisition closed today, you don't want to be short.