Analysts cool on prospects for Playboy

Though long-suffering Playboy Enterprises Inc. reported a tiny quarterly revenue increase last fall, the company hasn't convinced analysts improvement will be sustained. Two recommend selling the stock, another says hold.

Analysts estimate fourth quarter earnings, to be reported Wednesday, of 6 cents per share for the Chicago-based company, down from last year's fourth quarter earnings of 11 cents per share.

On the positive side, earnings for the full year 2007 are estimated to come in at 23 cents per share, up from the prior year's 13 cents per share. And analysts predict another rise in 2008, to 41 cents per share.

However, Matrix USA Inc. and SMH Capital Inc. recommend selling the stock, and UBS Securities LLC rates it neutral.

"As we have mentioned, we believe Playboy must consistently demonstrate a stabilized and recovering domestic TV segment before we believe the stock will begin to recover," stated UBS in a report. UBS has lowered its price target to $9 from $11 on "expectations that domestic TV will continue to disappoint."

Playboy's stock is thinly traded and is prone to fluctuations. Last fall it hit $11.40, only to drop to $7.99 last month. It now trades around $8.60.

The company has placed its hopes on its television and online content as it copes with continuing declines in its publishing operations.

The publishing segment posted losses in 2006 and 2005 on pressure from paper costs, postage increases, decreased circulation and falling advertising pages. Though advertising revenue rose $1.1 million in the first three quarters of 200, the increase was offset by a 3 percent decrease in average net revenue per page.

The number of Playboy magazine's advertising pages has declined steadily. In 2004 it had 573 advertising pages, in 2005 it dropped to 479, and they dropped further in 2006, to 429.

Total advertising pages for 2007 will be released in the company's report Wednesday.

Operating margin for the company in 2006 was a thin 3.35 percent, down from 9.17 percent in 2005.

In the first three quarters ended Sept. 30, the company swung to a profit of $5.98 million, or 18 cents per diluted share, compared with a loss of $1.38 million, or 4 cents per diluted share, in the 2006 period. Revenues were $253.9 million, slightly higher than $244.89 million. Third quarter revenues were $82.86 million, up from $82.3 million in 2006.

The company has not reduced long-term financing obligations, in the form of convertible notes of $115 million, since 2003, except for a brief dip to $80 million in 2004, which quickly rebounded to $115 million in 2005. At Sept. 30 that debt equaled 67 percent of shareholders' equity.

In addition to its continuing expansion of its online presence, the company recently diversified its revenue stream in a deal with mobile service provider giant Minick to provide mobile content. However, it has lost market share to men's magazines like Maxim and FHM.

"Although the company has stated that domestic TV revenue is stabilizing, we believe there is further downside risk," wrote UBS analysts in a report.