Saj Karsan has provided the following guest post on New Frontier Media, Inc. (NASDAQ:NOOF). Saj regularly posts Stock Ideas for Barel Karsan, and runs Karsan Value Funds, a private investment fund focused on value stocks. Here’s his take on NOOF:
Value investors are constantly on the look-out for businesses with “moats” that the competition cannot displace. Usually, this is the result of a competitive advantage that cannot be copied. But perhaps it can also be the result of being in a business that is shunned to the extent that no quality management wants to copy it.
Consider New Frontier Media (NOOF), producer and distributor of pornographic movies. The company has deals in place with the major cable providers which allows them to beam millions of dollars worth of adult pay-per-view content into homes throughout America and the world. Despite being a business that appears to be easily replicated, the company has enjoyed surprisingly good margins (approaching 20% on average) and returns (5-year ROE > 12%), beating up on its primary competitor, Playboy Enterprises (PLA).
Despite this, the company appears to trade at a substantial discount. New Frontier’s market cap is just $38 million, while the company has earned operating income far in excess of that in the last four years alone, even after including a $12 million goodwill write-down that caused the company’s 2009 net income to be negative. In addition, the company has $15 million of cash against just $3 million of debt.
The future is not without challenges, however. As consolidation in the cable industry throughout the United States has taken place, New Frontier’s customers have become more concentrated and powerful. As a result, New Frontier’s business would take a substantial hit if one of these operators switched to a different provider. More immediately, however, this has allowed the cable operators to push New Frontier on price, reducing domestic margins.
Furthermore, while the company’s founder Michael Weiner (which could also pass for a screen-name in this business) is still the chief executive, his annual salary and bonus dwarf his stock ownership in the company, which doesn’t say a lot for the company’s incentive structure. Nevertheless, the company has succeeded for years with Weiner at the helm, and shareholders appear to be offered a price at this level with a substantial margin of safety.
We first discussed this company a few months ago here.
Disclosure: Author has a long position in shares of NOOF
[Full Disclosure: I do not have a holding in NOOF. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
NOOF is a lame stock. They turned down the MBO offer from Steel Partners in 2006 and never recovered. Don’t waste your time on this POS ………..
LikeLike
Why do you cite “just $3mm of debt”? NOOF has $12.4mm in total liabilities. I think that would be more relevant.
http://quicktake.morningstar.com/StockNet/balance10.aspx?Country=USA&Symbol=NOOF
In any event, NOOF has $31mm in current assets against those liabilities, with a market cap of $36mm, so you can effectively buy the business for $17.4mm (if you trust the current asset values, and completely neglecting the fixed assets). On a company that seems able to generate a solid $4mm in owner earnings per year (if not more), valuation looks pretty good to me.
Fred is right to worry about the business model, but the internet has been around for some time now, and the business has only suffered modestly to this point.
Other thoughts?
LikeLike
I looked at them a year ago. One problem – they are obsolete. Adult film sales are plummeting because business travelers use their laptops/iphone (and now ipads) for porn.
The charged adult TV business has no business model going forward v a free substitute (the internet)
LikeLike