Marcial: Are Buyers Eyeing Playboy?

The price of an issue of Playboy magazine—$5.99 at your local newsstand—is far higher than the price of a share of Playboy Enterprises' (PLA) common stock. Shares of the adult entertainment company have fallen from 9.20 a share last year to 2.97 on Sept. 29, 2009. In its 1999 heyday, Playboy traded as high as 36 as share.

Some investors are now snapping up Playboy's stock. These smart money pros believe that Playboy founder Hugh Hefner, now 83, might entertain a buyout offer for the company, which they estimate is worth much more than the current price of its stock. Hefner owns 69.5% of Playboy's voting shares and 27% of the common stock, according to the company's April 2009 proxy statement.

"Playboy's global franchise, iconic brand, and assets, including the company's entertainment unit which generates 57% of revenues, [the] magazine that accounts for 29%, and licensing business, 14%, are worth three times its stock's current price," says Mark Boyar, president of Boyar Asset Management, which owns shares.

He argues that further restructuring of the company under its new CEO, Scott N. Flanders, who took over the helm of Playboy in June 2009, could help stanch further losses—and possibly enhance its worth.

Would Hefner Cash In? "But right now we believe the company is vulnerable to a takeover" given its depressed stock and losses in the past two years, says Boyar. The Playboy story, he asserts, is one of either a turnaround or a sale to interested buyers who may want to turn the company around themselves. Boyar says he expects a number of entertainment and media companies would be willing to acquire all or parts of Playboy.

Playboy's entertainment segment owns nine domestic cable TV channels and produces programs for them as well as for distribution to foreign TV companies and the home video market. Its licensing business is involved primarily in Playboy brand apparel, entertainment products, and accessories. Playboy's Internet business includes offshore sites offering gambling in sports, horse racing, and casino games. And the company-owned Playboy mansion in Los Angeles, Hef's lair for the past few decades, is valued at an estimated $40 million, according to Boyar.

"The catalyst [for a buyout happening] is that Hefner is getting on in years and may just be ready to give in to an acquisition offer at this point in his life," says Boyar. "He has lived a very full, glorious life, and may now want to cash in," he adds.

In the meantime, Wall Street's support for Playboy has dwindled, with only three analysts continuing to follow it. None recommend buying the stock; all three rate it a hold or neutral.

"Playboy has been hurt by weaker revenues in all three of its segments," notes Simon Shoucair, entertainment analyst at independent investment research firm Value Line (VALU). The economic crisis, he says, "further battered an already beleaguered top line as advertising revenues flounder, unfavorable currency translation hinders international sales, and domestic market share in the television category continues to decline."

Waiting for the Cost-Cutting Impact Nonetheless, the stock's "wide recovery potential to 2012-2014 may appeal to the more daring investor," says Shoucair. Playboy's much needed "aggressive cost-reduction and outsourcing initiatives should enable it to recover from its current turmoil," he adds.

Analyst David Bank of RBC Capital Markets says it likely will take another quarter before CEO Flanders can fully form a strategic direction to counteract competitors attacking Playboy's domestic TV and publishing businesses. Bank says he's delaying introduction of his 2010 estimates until he learns more about Flanders' plans in the months ahead. He figures Playboy will post a loss of 76¢ a share in 2009 on sales of $253.2 million, vs. a loss of $4.81 in 2008 on sales of $292.1 million. Value Line's Shoucair expects Playboy to be back in the black in 2010, earning 15¢ a share on estimated sales of $305 million.

Some of Playboy's big stakeholders have unloaded stock, including Wells Capital Management, which sold 500,000 shares as of June 30, cutting its holdings to 9.9%. But several other large investors increased their holdings as of June 30, including Barclays Global Investors, which bought 247,918 shares, bringing its total stake to 4.93% as of June 30, and Diamondback Capital, which bought 954,786 shares as of June 30, taking its holdings to 3.34%. BlackRock Advisors stayed with its stake of 7.19% as of June 30.

The company may take years to regain its footing. But for risk-tolerant, deep-value investors, Playboy may be worth a closer look.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Before it's here, it's on the Bloomberg Terminal.