Sunday, July 15, 2007

New Frontier Media: 6% Yield Attractive

New Frontier Media is in the adult entertainment media business. They have three different segments that provide products for that market. First, they have 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. They also have the Film Product Group which produces original adult themed movies and is a sales agency that helps independent filmmakers license their product; they were acquired in February of 2006. Their third segment is the Internet Group which distributes adult content through the internet.

They recently had earnings in early June and missed analyst estimates and that sent 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

Their primary competitor in the Adult Entertainment TV industry is Playboy and to a minor degree Hustler and Playgirl. They do 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 their adult entertainment TV and that could create a big opportunity for New Frontier Media to increase their penetration to more households. The big advantage that their TV has over Playboy’s is that they offer a wide variety of adult content from a lot of different independent producers, they do not use their own movies, this gives their TV channels an edge over Playboy’s. Their TV channels are the market leaders in adult oriented TV.

Their revenues have been growing at a very slow rate as of late; they actually had negative organic growth in Fiscal 2006, this is a concern. Their revenue growth rate over the past 4 years has been just under 8%. They have growth initiatives for this year such as their 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. They have $26 million of cash and cash equivalents and no debt. They pay a hefty dividend of 50 cents a year, which is a yield of about 6%, and it is sustainable due to the strength of their 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. Their cash flow from operations has been higher than their Net Income for each of the past 3 years, that shows the quality of their earnings and the strength of their cash flows. About 7% of the company is owned by insiders. Their 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 they are 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.

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