NOOF -- “Da Bulls” (improved earnings + very low valuation)

The Bull case for the stock is that there has been some positive earnings news recently and the fact that the stock continues to look tantalizingly cheap based on free cash flow.

NOOF has come off the $4 lows on the recent positive earnings news released on Feb. 5. Total sales were up 8% while the market expected a double digit slide experienced in the previous two quarters. EBITDA was up slightly which compares favorably to the 40%+ decline in EBITDA experienced in the previous two quarters.

Looking at the revenue breakdown in detail, one notices that the company’s largest business – Pay TV –is still experiencing double digit revenue declines. The upside came entirely from huge increase in revenue in the Film Production group as the company completed a “producer-for-hire” arrangement which was not there last year.

The CEO, Michael Weiner, stated on the latest conference call that he believes that the YoY revenue decline in Pay TV is over and next quarter will show positive YoY revenue growth. This implies that the company has been able to offset the re-rate with new products which is a very good sign.

The stock also continues to look very cheap despite the huge decline in profitability. Here is how I am looking at free cash flow:

Reported EBITDA $5.43M
Adjust for large one time deliverables in Film Group $(0.4M)
CAPEX $(0.5M)
Tax $(1.8M)
FCF* $3.0M
Annualized FCF* $12M
EV / FCF 7.3x
Cash Yield 14%

*Excludes “Content Amortization” expense and “Cash Investments in Content”. NOOF uses “film accounting” where they capitalize NOT expense the cash costs spent to produce films and than expense it over time in the form of amortization.

There has been some insider purchases recently as 3 different directors bought a combined $50K of NOOF on the open market. It should be noted that one of the largest shareholders, an activist fund called Steele Partners, has been dumping shares recently.

If NOOF can string together a few consecutive quarters of free cash flow growth, the stock would look even cheaper.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.