Company Focus
Recent articles:
• Can home builders handle a chill?, 11/16/2005
• 5 Dow dogs about to have their days, 11/9/2005
• Hop on board another China growth play, 11/2/2005
More...
| | Company Focus
Can Playboy pull a rabbit out of the hat?
Hugh Hefner recently bought millions of dollars' worth of Playboy stock. Does the Robed One know something about the struggling company that other investors don't?
By Michael Brush
Given the huge amount of adult entertainment we consume as a nation, its a wonder Playboy Enterprises' stock performs like it needs a dose of Viagra.
Just look at the size of the porn market: - Americans spend about $5 billion to $8 billion on smut each year.
- Sex sites account for 40% of all Internet traffic.
- Satellite and cable operators earn about $800 million a year from adult movies, or about 40% of pay TV and on-demand TV revenue.
Now look at how Playboy Enterprises (PLA, news, msgs) continues to struggle:
- Playboy magazine lost money last quarter as publishing revenue slipped 8%. Playboy circulation fell again to near 3 million -- which means the monthly places 19th among U.S. magazines.
- Founded by Hugh Hefner in 1953, the magazine is now firmly entrenched in circulation rankings below National Geographic, Good Housekeeping and Ladies Home Journal. So far this year, Playboy's publishing unit has lost $3.4 million.
- In the third quarter, Playboy as a company took in just $80.9 million in revenue. The 10 cents a share in profit Playboy earned may seem good -- since that beat last years results by four cents. But a closer peek reveals cost-cutting saved the day, along with sharp declines in taxes and interest payments. Without that help, which cant last forever, the company would have reported a loss of 5 cents per share.
- For the first three quarters of the year, Playboy revenue grew an anemic 3%, and the business lost 16 cents a share -- exactly the same amount of red ink spilled in the same period last year.
All of this paints a fairly dreary portrait of Playboy.
Related news and commentary on MSN Money
Hef's buying
So when Hefner stepped up to purchase $3.5 million worth of Playboy stock -- at $14.40 and $15.36 a share -- earlier this month, it raised eyebrows. Has Hef's famed lifestyle finally taken its toll? After all, even normally bullish Wall Street analysts don't expect much from the stock.
For example, Jefferies & Company analyst Robert Routh thinks the stock should now be worth about 7% above the recent price of $15.20. Credit Suisse First Boston analyst William Drewry looks for $17 in 12 months.
Hefners daughter Christie Hefner is chief executive, but the patriarch has a controlling stake in the class of Playboy shares with all the voting clout. If the 79-year-old Heffner knows what he's doing -- and insiders who buy shares typically do -- Playboy may yet pull a rabbit out of the hat.
There's no question that competing magazines are eating away at Playboy's market share by offering hardcore fare -- something Hef refuses to do. But Hef knows hes got something theyll never have: the Playboy brand.
Playboy is working to better exploit its bunny-ear brand. The company wants to put its logo on everything from perfume, lingerie, blue jeans, overseas TV channels and retail stores to casinos.
The brand makes them unique, says Mark Boyar of Boyar Asset Management, which holds the stock in its Boyar Value fund (BOYAX). There is nobody on the planet that hasnt heard of Playboy. Branding deals typically carry opulent profit margins, a key to getting the company's stock moving again.
Here's a look at what makes Playboy an attractive value play.
Entertainment: The world awaits
Overall revenue grew just 3% in the first three quarters of this year, but Playboys entertainment division was up 8%. At Playboy, entertainment means pay-per-view and subscription-based TV broadcasting, through the Playboy channel and Spice networks here in the U.S.
The real growth in this business is in international markets, where sales grew 16% in the first nine months of this year. Because the company merely recycled many of the same offerings across new markets, much of the new revenue fell right to the bottom line, says finance chief Linda Harvard.
Operating income (which excludes taxes, interest and some accounting adjustments) in the entertainment unit exploded, jumping 58%. And theres plenty of territory to conquer to produce similarly impressive results. They have a lot of content they can sell over and over again, says Boyar.
Where?
CFSBs Drewry believes some of the best prospects lie in Italy, where Playboy has no presence, and in Germany and France. But that's really just the start, as the U.S. and UK remain the only markets Playboy has fully exploited.
Jefferies Routh thinks a recent alliance with Private Media Group (PRVT, news, msgs), a Spanish porn company with a European reach, could help Playboy get into new markets in Eastern and Central Europe.
These efforts are crucial, because the entertainment division accounts for 60% of company revenue. This includes an online business which makes up about 19% of entertainment revenue. Playboys online business is also growing at a healthy clip. Online subscriptions are up 10% as of the end of September, and e-commerce is up 16%.
Page 1 of 2 Story continues on next page
|
