Stock Focus: Adult Entertainment Companies

No one knows for sure how many adult-oriented sites exist on the Internet, but many of these "unique" sites fall under the umbrella of a handful of companies.

"The adult entertainment industry usually is not badly affected by a wider slowdown," says David Brenner, equity analyst at Ladenburg Thalmann. "The business is recession-resistant, though not recession-proof."

That's because adult entertainment products are relatively inexpensive and largely purchased on impulse, according to Brenner's colleague, Robert Routh, who says that U.S. sales of adult entertainment, including magazines, movies, telephone sex and the Internet, amount to about $11 billion.

Adult entertainment businesses can expect to see their market capitalizations at least triple over the next five to seven years, according to Routh. One reason is that the industry is becoming more socially accepted, he says, citing AT&T 's distribution of the Hot Network to digital cable customers as an example.

Investing in this sector still has its pitfalls, however. Anyone with a cheap digital camera, a computer and a Web account can get into the business. Many mutual funds and individual investors avoid adult-oriented companies, and the industry is under constant fire from pressure groups and politicians.

One way for these companies to limit public scrutiny is to stay private. Among the large private adult-oriented companies are Vivid Video and Larry Flynt Publishing . Playboy is one of the oldest and largest public entities but has struggled for years. In the 12 months ended in March, Playboy lost $53 million on revenue of $301 million. With a market capitalization of only $285 million, Playboy sells for 0.9 times its sales.

One of the reasons Playboy fell behind, Brenner claims, is that it had hesitated too long before offering harder-edge content. That's one reason why Playboy bought the competing Spice Channel in 1999. In the coming months, Playboy will launch three new Spice networks, which will be more overt than the original.

Another big player is Barcelona, Spain-based Private Media Group . Last year the company made $6 million in net income. For all of 2001, Brenner expects profits more than twice those of last year.

Brenner notes that Private Media's cable channels are already watched in 24 million homes worldwide, while Playboy's are seen in 26 million. The company is now trying to secure two satellite and cable channels in the U.S. and, if it wins permission, Brenner says he would be even more bullish on the stock.

After four straight years of losses, Houston, Tex.-based Rick's Cabaret , an operator of adult entertainment Web sites, nightclubs, bars and restaurants, eked out a tiny profit of $203,000 on sales of $12.7 million for the fiscal year ended September 2000.

New Frontier Media delivers adult entertainment via cable and satellite as well as through the Internet. For the 12 months ended in December, the Boulder, Colo.-based company reported sales of $58 million, a jump of 13% from the same period the previous year. Shares of New Frontier currently trade 61% below their 52-week high. Routh thinks that New Frontier may get out of the broadcast business and focus on the Web.

Adult Entertainment Stocks Prices as of May 22. * Latest 12 months. Sources: Market Guide and FT Interactive Data via FactSet Research Systems

Company	Price	Change From 52-Week High	Sales*	Net Income*	Market Value ($mil)
New Frontier Media	$3.54	-61%	$58	-$1	$74
Playboy	14.65	-8	301	-53	285
Private Media Group	5.60	-53	28	6	158
Rick's Cabaret	2.10	-38	18	1	10

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