Small-cap play of the day: Virgin vs. the bunny
Today's Financial News - Posted June 2, 2009
A brand is a powerful thing to waste. As Playboy succumbs to competition, investors want to know what is next. Today’s news helps shed some light on the subject.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): While Hugh Heffner is far from a positive role model, he sure does know how to create a powerful brand. Whether it is his grandiose lifestyle or his ever-popular Playboy magazine, the king of the bunnies knows how to create and maintain an image.
Now that Heffner’s revolutionary magazine is falling to the power of an ever-growing population of Web competition, his company, Playboy Enterprises (NYSE:PLA), has been forced to re-evaluate its future.
During the most-recent quarter, Playboy lost $13.7 million thanks to a drop in revenues of more than 20%. With magazine readership down and a glut of Internet competition, investors and analysts are asking what is next for the company.
Is it possible for the company to make a turnaround on its own? Or is the powerful Playboy brand more valuable to somebody else?
As of last week, most analysts would have told you a sale is imminent. Sir Richard Branson was hotly rumored to be a potential suitor to the Playboy enterprise. But his Virgin Group quickly put a stop to the rumor.
A new addition to the grotto
Today, Playboy is giving investors even more reasons to believe there is no imminent sale. It announced the addition of a new CEO, to replace Hefner’s daughter, Christie, and her interim replacement.
Scott Flanders is now in charge of the iconic brand. According to share-price action Wall Street believes the addition is a signal the company wants to rebuild its brand from within. Shares are down by about 1% so far today.
But digging through Flanders’ history, it becomes obvious this guy is a deal maker. At his former post, the boss at Freedom Communications, he brokered deals with a couple of private-equity investors that helped save the company from being torn apart.
In his new role, it may be likely that Flanders’ unspoken goal is to get the $300 million Mr. Hefner wants for his bunny image. With a current market value of just a third of that figure, it will be tough work, but there is no denying another company, with a fresher business model, could do more with the Playboy name.
My take is we will see a sale within the next twelve months that locks Playboy’s value at $250 million or so. Virgin has the creative expertise to make a deal a success, but there are other companies watching the action quite closely.
As an investor, this is a stock to watch. As far as small caps go, it is one of the most reliable and predictable. Triple-digit gains are possible, yet the downside is rather limited.
Sometimes a brand is worth far more than the business it represents. In the right hands, Playboy could be worth a fortune.
Next Article: Take advantage of the “tall-grass” indicator
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