Gaiam: A Misunderstood Value Stock?

| About: Gaia Inc. (GAIA)

Gaiam Inc. (NASDAQ:GAIA) is a lifestyle media company providing a range of information, media, products and services to customers who value personal development, wellness, ecological lifestyles and responsible media. With a price-book value of 0.66, the company appears to be trading at a discount, but the company's financials have left it largely misunderstood.

Misunderstood Revenues

Last quarter, Gaiam reported revenues that dropped $7.5 million, or 13.6%, to $47.3 million. But the loss was primarily the result of a deconsolidation of its Real Goods Solar subsidiary. Excluding that transaction, net revenues increased $9.9 million, or 26.6%, driven by the firm's media aggregator role for Target (NYSE:TGT) as well as improvements in sales performance.

Gaiam also acquired Vivendi Entertainment (OTCPK:VIVEF) in March of this year, which is the third largest non-theatrical content distributor in the U.S. with rights to over 8,000 titles. By combining distribution operations, the company hopes to realize significant economies of scale and strengthen its lifestyle media offerings and distribution channels.

With regards to the Target role and acquisition, the firm noted in a recent SEC filing:

During the first quarter of 2012, the improvement in our business segment was driven primarily by our media aggregator role with Target, which we expect to leverage and expand to other retailers and digital partners. This segment also benefited from two new branded product lines: Restore, our at-home rehabilitative and restorative accessories, and Gaiam Sol, our premium yoga line, both of which we launched during the fourth quarter of 2011. During 2012, this segment will also be offering through its retailer and digital partners several As Seen On TV fitness media and healthy living products, some of which will be featuring The Biggest Loser star, Jillian Michaels, as well as our other branded fitness media, such as The Firm Express. With our branded products and category management and media aggregator roles, we effectively control the yoga and fitness offerings at some of the largest retailers in the nation.

In addition to our fitness accessory business, we also distribute entertainment media titles owned by third-party studios and ourselves. We provide full distribution services including marketing, logistics, and sales to physical and digital online retailers. With the acquisition of Vivendi Entertainment in March 2012, Gaiam's entertainment media business has grown to become the the third largest non-theatrical content distributor in the United States with rights to over 8,000 titles. By combining the distribution operations of both companies, we expect to realize operational and financial synergies, including reduced replication, fulfillment, post-production and digital distribution costs. Overall, we believe the financial benefits of this acquisition strengthen our position as a leading branded lifestyle media company with extensive retailer, direct to consumer, and online sales channels. During the following months, our entertainment business will be focused on finalizing the integration of Vivendi and delivering growth through addition of new distribution and licensing contracts as well as expansion of sales to digital video providers.

On the expense side of things, cost of goods sold decreased 30.1% to $20.2 million due to a significant increase in sales in its low-overhead direct response marketing business. However, it's worth noting that the business segment saw a higher COGS figure due to its product mix, although those figures should even out over the coming quarters; the business segment's product mix is already favoring lower margin products now.

While Gaiam continues to operate at a net loss, the company's revenues and expenses are heading in the right direction. Agreements with Target and the acquisition of Vivendi Entertainment could also provide significant upside moving forward.

Trading at a Significant Discount

Gaiam trades at a significant discount to its intrinsic value and potential growth. Despite an enterprise value of $105.54 million and a book value of $5.61 per share, the company trades with a market capitalization of just $86.04 million or $3.79 per share. Provided the firm turns a profit, this makes for a very cheap cost basis for investors at the moment.

On a growth basis, the company trades with a forward price-earnings multiple of 9.97x and a price-sales ratio of just 0.32x. The agreement with Target and recent acquisition could further propel growth rates, while the firm's balance sheet remains very strong, with $202.7 million in assets compared to just $72.5 million in liabilities.

In the end, Gaiam appears to be an undervalued stock that is a leader in the fitness/wellness media industry with a 38% market share, according to Nielson's Videoscan, and misunderstood in today's environment. While it's not yet turning a profit, the company's revenues are rising thanks to many catalysts and its expenses are dropping. Combined, this makes it a stock worth considering for any value investor willing to assume the risk of holding a volatile small cap stock.

A Few Risks to Consider

Here are some risks that may affect the company to keep in mind:

  • Sales are affected by seasonal influences, meaning that the company's fourth quarter tends to be its largest.
  • Competition exists in the LOHAS market, but there are few dominant leaders due to the market's fragmentation.
  • The company's founder and Chairman Mr. Rysavy holds 100% of the firm's Class B common stock and a large stake of Class A stock, which means he holds about 77% of the voting power.
  • The company's Real Goods Solar - now held as an equity investment after the deconsolidation - could still depreciate in value after posting a net loss in 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.