NOOF reported first quarter earnings this past week, and turned in a solidly profitable quarter, after suffering through two write-down plagued years.

Financial Highlights

Revenues were flat compared to the same quarter last year, coming in at approximately $12.5m. Margins took a hit, primarily due to higher costs in the Film Production segment, causing net income to fall 33%.

It was an unusual quarter from a cash flow basis, as NOOF actually used cash in operating activities.

As opposed to its traditional TV business, the company pays for the upfront costs in its Film Production segment, only to recoup the money later once the finished product is delivered.

Under this arrangement, the company has approx. $5.3m in cash that should be collected in the next few quarters.

While this strategy entails risk (NOOF might have to absorb the costs if the end customer doesn’t end up paying), the company’s balance sheet is very strong, with $14.1m of cash on hand along with an unused $4m credit line.

Domestic Growth?

Domestic sales – still the vast majority of NOOF’s revenues – are still showing the effects of the economic downturn. However, the company seems to be working hard to address these challenges by testing new initiatives in several test markets.

According to the CEO,

“We believe these results indicate that improvements in category results are achievable. If operators choose to roll-out these new products across their platforms and do so quickly, our financial results could benefit on both a near-term and long-term basis.”

International Growth Opportunity

For future prospects, the international market holds the key to NOOF’s future.

For the quarter, international revenue doubled in the Transactional TV segment, and on August 3rd, the company announced that it entered into a five-year license agreement to rebrand and distributed three new channels throughout Europe, the Middle East, and areas of Northern Africa.

The new channels are expected to reach over 49 million unique homes and are an entirely new revenue opportunity.

Even better, there is much less consolidation internationally among operators. According to the CFO, NOOF can expect much higher margins with these agreements as compared to the domestic market (30-50% as compared to 10-15% domestically).

Institutional and Insider Ownership

During the quarter, NOOF also filed its DEF14A for the year.

The stock remains popular with several institutional firms and hedge funds, with several investors holding a large stake in the business.

While several funds have trimmed their holdings slightly over the past year, a brand new investor – Robeco Investment Management – picked up a 7.6% stake.

In addition, company insiders have increased their ownership in the business to 10.3%, an increase of 2.6%.

Increased ownership by both investment management firms and insiders is an encouraging sign, as other investors (and insiders!) believe the company’s prospects are positive going forward

Conclusion

By most any measure, the stock remains extraordinary cheap:

• Price/Sales – 0.62
• Price/Book – 0.60
• Forward P/E – 5.4

Although some might argue that long-term prospects for the business are challenging, NOOF certainly has big plans:

“we expect to increase our distribution to over 300 million worldwide network homes, representing an increase of approximately 40% over our current distribution.”

With hoards of cash, a solid balance sheet, and potential growth both domestically and internationally, NOOF should increase from its current lows.

Disclosure

Long NOOF

Overview

New Frontier Media (NOOF) reported 4Q and 2010 fiscal year results last week. The Company continues to struggle with a decline in domestic revenue and the impairment of intangible assets. There is no doubt that the economic downturn is negatively affecting the company, but the Company remains in solid financial shape, especially from a cash flow and balance sheet perspective.

Sales Results

Net sales decreased to $50.4m, a 4.4% drop from the prior fiscal year. In the Transactional TV segment, sales decreased by 12%, partially offset by a 40% increase in the Film Production segment. Profit margins in the TV segment average around 70%, compared to margins around 50% for the other business segments – if the trend continues, the Company will need to closely monitor costs, or bottom line profitability could erode further.

However, several bright spots remain from a top-line analysis:

The 4.4% sales decreased was moderate compared to the 11.7% drop in revenue from 2008 to 2009, the (hopeful) start of a positive trend. Q4 revenues of $15.1m were the highest quarterly revenue since Dec 2007. Although domestic business has stagnated, international sales increased 61.7% and now makeup 14% of total sales.

Owner Earnings

In the past two years, the Company has been forced to write down a significant portion of their intangible assets (writedowns of $11.31m in 2009 and $7.19m in 2010). Overall, goodwill and other intangible assets have dropped from approx $22m in 2008 to approx $4.3m in 2010.

As an investor, this shows the danger of investing in companies with a substantial balance of intangible assets – the value of those assets can be fleeting when compared to hard assets like cash or PP&E.

The good news is that the Company has written off all of the goodwill from the Film Production business, so further writedowns are unlikely.

Despite the non-cash charges, NOOF continues to generate healthy Owner Earnings (OE), with $6.04m in 2010:

Add back the non-cash impairment charges, and a clear uptrend in ‘normal’ owner earnings over the past two years can be identified, despite the net losses.   In most cases, cash flow is usually a better indicator of the financial health of the business.

Balance Sheet

Although the company’s topline performance will probably continue to struggle, the balance sheet is solid – especially since the majority of the intangible assets have been eliminated.

The Company’s quick and current ratio is 3.2 and 3.5 respectively, the highest numbers since 2005. Total liabilities dropped almost $5m, as the Company reduced accounts payable by 29% and paid off $3m off their outstanding credit line.

Valuation

Even with no growth, the company looks extraordinary cheap. At current levels, NOOF is trading at 5.5x OE. With conservative topline estimates going forward (and no writedowns), the business should generate roughly $12m in owner earnings in 2011, or 2.6x OE at current price levels.

Conservative Valuation: $2.5-$3.5

Aggressive Valuation: $5-6

Disclosure

Long NOOF

To give some background on my investing decisions, I’ve included a sampling of my recent stock writeups:

CHDN / UBET – Churchill Downs & Youbet Merger – My first ‘special situation’ investment of the year, a merger arbitrage play. Still offering a 13% spread for a merger that will likely close in the next few weeks, although it has ran a bit the date I estimated for. Already received shareholder approval, both management teams are committed to making it work, and CHDN has sold off the necessary businesses – just need final approval from regulators.

TPCS – Techprecision Corp – A growth stock with potential that is too hard to ignore. Heavy dependence on the solar market. Stock took a huge hit after its largest customer, GT Solar, canceled a multi-million dollar order last year. Recent filings show the return of GT Solar’s business, and the company is trying to diversify and take advantage of other macro trends in medical devices and nuclear power. Cheap even if the other growth prospects don’t materialize. Value: $2 or more.

APNC – Access Plans, Inc – Went through a major acquisition last year that more than doubled the size of the company. Alternative insurance-like products in high demand as people lose their jobs and cancel traditional medical insurance. Market does not seem to be pricing in the potential of the combined entity. Insiders hold 71% of outstanding shares and have been buying more. Value is more than double the current price.

ITI – Iteris, Inc – Strong insider buying back in Feburary. Stock has dropped back after reporting tough Q4 results. Large NOL carryforwards, meaning the company won’t be paying income taxes for a long time. Upside potential once the heavy truck market picks back up and a very neat technology that has real potential. Value: $3 with upside north of $4.50

ADVC – Advant-e Corporation – Small software company with steady revenues throughout the recession. Management is paying out another $.02/share in dividends in 2010 – that’s an easy 12% return. Value: $.30

NOOF – New Frontier Media – Stock is down almost 20% from its March highs on no real news. Insiders were buying up stock at around this price back in late 2009. Large goodwill writedown in 2009 scared many investors away. Outstanding CROIC numbers >50% and very aggressive company repurchase program should drive help drive price upwards. Value: at least $4.

SPAN – Span-America Medical Systems – Company has been paying dividends for 82 consecutive quarters and just paid out a $1 special dividend, a great sign. Average CROIC of 26.5 over the past three years. Owner’s earnings of 5.2m in 2009 was the company’s highest ever despite slow sales during the recession. Value is $25+

ACU – Acme United Corporation – Maker of school supplies has been around since 1867. >5% ownership interest from two institutional investors and insiders hold 26.7% of outstanding stock. 2009 was rough but the company should bounce back and continue to deliver solid income and FCF.  Ultra conservative valuation of $13/share. Under normal growth scenarios, it should be trading between $17-$20.

Disclosure

*Long TPCS, APNC, ITI, ADVC, NOOF, SPAN, ACU, UBET. Short CHDN