NOOF -- First Look

Share Price: $4.5
Market Value: $107M
Enterprise Value: $88
Investment Type: Value Investment

New Frontier Media, Inc (NOOF) is one of the largest distributors of adult entertainment (aka porno) through U.S. cable and satellite networks. The company estimates that it can reach almost 140 million households. Recently, NOOF has started creating its own erotic and mainstream content.

The company is made up of several business lines:

1) Pay TV (recently renamed “Transactional TV”) has historically been NOOF’s largest source of revenue and income. This business unit has provided content for cable/satellite operators either in the form of subscription channels or Video-On-Demand (VOD). The company makes money buy paying the content providers and splitting the revenue with the network operators. It’s key to understand that historically NOOF has not created the content, primarily serving as a middle man between the content creator and owner of the distribution network.

2) Film Production is a new business segment for NOOF, created almost exactly two years ago when the company acquired MRG Entertainment. This group creates original erotic content, acts as a representative for content created by others (porno agent), or as a “producer-for-hire” hired by major studios to deliver a movie or TV series. NOOF paid $21.1M for MRG in an all cash transaction in February 2006.

3) The Internet Group does exactly what the name implies – sell porno on the internet—and is the smallest revenue and profit generator for NOOF. NOOF provides the large cable/satellite networks with new channels and selected content and splits the revenue generated based on negotiated rates. Growth comes mostly by adding new channels to current networks.

Historically, NOOF has not created the content or own the network allowing for very little working capital and Capex costs. Due to low investment requirements, the company has produced an average ROE over the last 4 years of 27%. The other side of that coin is that NOOF has very little bargaining power when renegotiating revenue splits with the network providers.

I purchased NOOF in 3 parts between June 2006 and May 2007 for an average cost basis of $9.09. In that time I have received $0.875 in dividends (one of my 3 purchases occurred after the special dividend of $0.60) which brings my costs basis to $8.215. With the stock so much below my initial purchase price I can no longer just hold it, I have to make a decision to either buy more or start liquidating the 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.