That's Entertainment, Adult Style (PLA, NOOF, RICK)

By Stephen Brown | March 29, 2007 AAA

I realize that Investopedia is a family-friendly website, but I also realize it's a website that provides investment information on legal business enterprises.

With that preamble out of the way, I'll address a possible value-oriented industry that doesn't receive much run in the financial press -- adult entertainment.

If you're still with me, let's take a look at industry facts.

Although the vagaries of entertainment accounting are well-documented, the adult-entertainment industry, at around $12 billion in annual revenue, is even larger than mainstream American cinema revenue, estimated at $9 billion annually.

Going Legit
But maybe adult entertainment is mainstream after all. News Corp's (NYSE: NWS) Direct TV (NYSE: DTV) and the former AT&T Broadband, now a unit of Comcast (Nasdaq: CMCSA) are carrying movies depicting "adult situations".

With those kind of revenue numbers and market penetration, it was only a matter of time before private equity took note, albeit in the form of small peeks from behind the curtains. recently reported that one former Wall Street hedge fund believes riches are to be made by matching investors with adult-entertainment companies. To do that, he's raising money for two funds: a $100 million fund that requires a minimum investment of $1 million, and a $10 million fund with a $100,000 minimum.

Okay, so you don't want to allocate (if you want to allocate at all) $1 million or even $100,000 chunks of capital to adult-entertainment investments, but you can invest in much smaller chunks. At least half a dozen public companies avail themselves for public-equity investment. Of those, I consider three investment grade stocks to be Playboy (NYSE: PLA), New Frontier Media (Nasdaq: NOOF), and Rick's Cabaret International (Nasdaq: RICK).

Rascally Rabbit
Let's start with Playboy. The company publishes its familiar magazine and develops and distributes multimedia lifestyle entertainment for adult audiences. In laymen's argot, they publish a magazine and produce whacky cable shows (The Girls Next Door) and adult films.

Unfortunately, they haven't been doing a good job doing any of the above lately. Playboy's stock is down roughly 24% in the past year, and for good reason -- financial performance has been dismal. For the most recent quarter, net income dropped to $3.7 million, or $0.11 per share, versus $4.6 million, or $0.14 per share, in the previous year, while quarterly revenue declined $5 million to $86.2 million from $91 million. The company blamed "weakness in its entertainment and publishing divisions." No kidding.

Still, Playboy's stock might be worth a look. At its current price of $10 and change, it sports a forward P/E of 25 and a Price/Sales Ratio of 1.10, which is in line with media averages. Most importantly, it owns one of the most recognized brands in the world.

A New Frontier
On a lower plane is New Frontier Media, a distributor and producer of adult films sold through DVD and cable. Unlike Playboy, New Frontier is on a roll -- revenues for the nine months ended Dec. 31, 2006, were $49.1 million versus $33.9 million in the prior-year period. Meanwhile, net income was $10.6 million, or $0.44 per share, versus $8.0 million, or $0.34 per share, in the same period.

Moreover, New Frontier's balance sheet is as clean as a whistle, sporting no long term debt and an impressive current ratio 4.4.

Such liquidity enabled New Frontier to declare a special dividend of $0.60 per share in December. It also announced a semi-annual dividend program equal to 60% of free cash flow. New Frontier expects the first payment to occur this September.

Given its shareholder-friendly way, it's no wonder New Frontier's stock is up over 20% in the past year.

Life is a Cabaret
In a different line, but same theme, Rick's Cabaret operates upscale adult nightclubs that offer live adult entertainment, restaurants, and bar service. And it's been doing all three impressively. Rick's reported fiscal 2006 net earnings of $1.75 million, or $0.35 per share compared to a net loss of $215,148, or $0.05 per share, in 2009, while revenue in 2006 rose from to $24.5 million from $14.8 million.

Of course the future is what matters, and Rick's future appears bright. Strong upside is anticipated from a recently purchased club in New York as well as from newly opened and re-launched clubs. In short, Rick's expects to add $15 million in annual revenue by 2008.

Investors must like what they see and hear; Rick's stock is up nearly 80% over the past 52 weeks.

Obviously this little triptych of adult life isn't for everyone, but they meet a certain need, and, more importantly to investors, they attempt to meet it profitably.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus
Related Analysis
  1. In Telecom, Wireless Still the Key - Industry Outlook
    Stock Analysis

    In Telecom, Wireless Still the Key - Industry Outlook

  2. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  3. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  4. Get The Same 'Tax-Free Dividends' As Warren Buffett
    Stock Analysis

    Get The Same 'Tax-Free Dividends' As Warren Buffett

  5. How to Make Double-Digit Returns on the Recovery No One Believes In
    Stock Analysis

    How to Make Double-Digit Returns on the Recovery No One Believes In

Trading Center