NOOF -- Final

The key bearish case for NOOF is that the company has no bargaining power against the cable/satellite companies and any above average profit margins will be constantly eroded which means the stock deserves a low multiple. Also, the company is allocating a lot more cash to the very volatile content creation business essentially trying to build a tiny movie studio. Due to the nature of the “content creation” business, movie studios have generally been very poor investments.

The key bullish case is the recent positive earnings news and trading at 7.3x EV/FCF the company continues to look cheap. Also, all indication point that NOOF is the premier name in the business and should continue to win distribution partnership with brand owners like Penthouse.

Based on my estimates of FCF, the $0.50 per share annual dividend is safe. However, there will be nothing left to reinvest in the business which stifles future earnings growth and any future dividend increase.

Keeping in mind that NOOF is hostage to the cable/satellite companies, I have a hard time envisioning any valuation expansion from current levels. Even if growth returns to 10% annually and I assume a multiple of 10x FCF/EV in 3 years, I get an implied 3 year total return of 80%.

While 80% upside over 3 years certainly looks attractive, the downside is also substantial. I think NOOF will continue to face both long term and short term revenue pressure from its other 3 customer who will expect to renegotiate their contract and get the same deal as EchoStar. Any abnormal earnings return will be taken away by the network providers.

Adding to this company specific issue is the fact that traditional media companies will continue to face pressure from online players and while they will adjust their business models I have a hard time seeing much valuation expansion in a more competitive operating environment.

Simply stated, I don’t feel the downside justifies the upside and since I am not willing to buy more shares at this price I have now choice but to take the loss and liquidate my position.

* 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.