Is Playboy a C-K?
No, not so.
by Tom Gardner (

ALEXANDRIA, VA (Oct. 29, 1998) -- You say you're looking for a worldwide brand. You say you want a business that generates habitual buying from its customers. You say you want a company with no long-term debt. You say you're looking for careful product management. And you say you want to beat the market with your investments.

How about Playboy Enterprises (NYSE: PLA)?

The company is known across the world. Playboy Magazine is the 15th most popular magazine in America, with more than 3 million paying subscribers. And its average buyer is a bit of an addict, locked in for repeated purchase. On the financial side, the company has not a dollar of long-term debt. And in managing its inventory and collections, Playboy has held its Flow Ratio below our standard of 1.25 for years. Very fine, very fine.

Playboy meets a number of our Cash-King criteria. And so it might shock you to find that the stock has not appreciated since New Year's Day, 1994 -- during a period that the market has grown more than 120% (Playboy vs. The S&P 500 -- date to January 1st). And if you really want to be shocked, compare the value of the Playboy franchise to some of the roaring new Internet brands today:

Playboy   $200 million 
 eBay        $3 billion 
 Amazo n     $6 billion 
 Yahoo!     $12 billion 
 AOL        $28 billion
Yep, eBay is worth 15x more than Playboy; is worth 30x more; Yahoo is worth 60x more; and America Online is worth 140x more than Playboy. Truly, the value of Playboy's global brand is worth less than it seems. In under six years in the public markets, the five Internet brands above have created exponentially more value than Playboy has in its nearly fifty years of business.

Now you may be saying, "Aw, that's unfair, Tom. You've compared online retailers and online subscription services to a media company." Ok, fair enough. But what about two media brands on the Internet today -- both still largely unknown in the mass markets. CBS Sportsline is valued at $270 million. And CNet is valued at $700 million. Playboy is better known, with many more subscribers, a longer history of operation, and considerably more sales than CNet. Yet the young Internet "publisher" is valued 3.5x richer.

What gives? It almost seems absurd.

A simple argument against giving these capitalization figures too much weight is that valuations on Wall Street are temporary things. One day traders have bid up a finger-printing technology company over a billion dollars; the next day the SEC has halted trading and the company is racing toward bankruptcy. Because of this, some people believe these Internet valuations are absurd, extremely absurd.

But I hope that even if you are a grump about the going prices for a slip of Internet ownership, you'll at least consider why these businesses are more valuable than Playboy Enterprises today, and you'll entertain the possibility that it's likely to continue. In defense of this, I'll submit three things about this business that do not meet our C-K criteria. Yes, Playboy has worldwide recognition, loyal customers, no debt, and tight controls on inventory and collections. But this media machine is not a Cash-King business and, barring some profound changes in their approach, is unlikely to ever become one.

Here's why:

1. Gross margins of 14%

Like many magazines, Playboy has paper-thin margins. After the expense of writing, printing, and delivering its magazine -- the core of its business -- Playboy only has $0.14 off every dollar of sales with which to work. Not a lot of room for promotion. Playboy's gross margins are 36 percentage points below our baseline C-K standard.

2. Net margins under 2%

Playboy hasn't generated much profit in the 1990s. After years at breakeven, the company generates about 1.5 cents in earnings off each dollar of sales. Though the company is managed very conservatively -- no debt and strong financial controls -- there's very little oomph to the business model. The media company has $300 million in sales, but posted only $1.5 million in savings in its most recent quarter.

An enduringly low margin of profit leads to enduringly little cash, which leads to enduringly slowing growth.

3. Customer Growth

But you can look at those numbers and still not have an intuitive understanding of the business. To really grasp the low valuation, we have to try to understand why Playboy is posting mediocre numbers. Frankly, it's not terribly complex. The business is struggling because its editorial mission acts as a serious constraint to new customer acquisition. Here are two examples of why:

Illustration #1. This morning I quizzed my sister, who is learning more about investing each day and whose instincts are often better than mine, why a company like eBay would be 15x more valuable than Playboy. And why Yahoo! is valued 60x greater than Playboy, even though it's been in business for just a few years.

She said, "Well, the whole world can use Yahoo! The whole world could be an AOL subscriber some day. Tens of millions of people might buy something through eBay in ten years. They have the potential. But Playboy -- you can already picture the person who's buying it. And I don't think it's a growing audience." (She then made a pretty funny joke which, for legal reasons, I won't repeat!)

And she's right. There's a clear constraint on Playboy's customer base

Illustration #2. About six months ago, Playboy asked to interview David and I in their Twenty Questions feature. The magazine has over 3 million subscribers, many of whom are investors. In many ways it was a great opportunity. At the same time, as a company, we agonized a bit over whether to do it. We eventually decided to do the interview (which will appear in the February issue), but the healthy discussion surrounding the decision illustrated to me that Playboy Enterprises is in some trouble today.

In part, that's because a growing number of men and women have been schooled together, work together, and hang out together today. Certainly more than ever before. Given that, there's a narrowing audience for Playboy's still exclusionary message. And... this is also happening at a time when the Playboy mystique is becoming considerably less revolutionary.

The company is struggling because it has found no revolution and a discomfort with its message. What's happening is that America is growing up, thinking more, and becoming less exclusive every day -- and Playboy, even just in name, is falling behind. Don't get me wrong, in an open society, there will always be room for these "adult" products and services -- and there always should be. But will they make for the stuff of Cash-Kings? A shake of the Magic 8-Ball says, "Outlook not so good."

To close out this week, I'll be reviewing one of the Gap's lead competitors, Abercrombie & Fitch. Is it a Cash-King? Well, there are some very, very attractive elements of the business. We'll see tomorrow.

And finally a reminder: The Fool will be hiring a full-timer to help administer to and guide the ongoing affairs of the Cash-King portfolio. If you'd like more information on this, please e-mail and we'll forward the job specifications out to you. Thanks to the many who have dropped Foolishly enthusiastic notes thus far! We're looking for a few good people with the mettle to be Fools.

Fool on,

Tom Gardner

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10/29/98 Close

Stock  Change    Bid 
 AXP   -1 5/16  85.69 
 CHV   +1 3/8   79.88 
 CSCO  -  3/16  62.69 
 KO    +  1/4   67.81 
 GPS   +3 7/8   59.00 
 EK    +1 7/16  75.94 
 XON   +2 7/16  72.69 
 GM    -1 1/4   61.19 
 INTC  +  17/32 89.75 
 MSFT  +  7/8   106.56 
 PFE   +2 1/16  107.63 
 SGP   +1 11/16 103.69 
 TROW  +  7/8   32.00 
                  Day     Month   Year    History 
         C-K      +1.53%   4.24%   9.77%   9.77% 
         S&P:     +1.66%   6.77%   7.94%   7.94% 
         NASDAQ:  +1.14%   3.74%   5.50%   5.50% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    106.56    36.15% 
     2/3/98   22 Pfizer        82.30    107.63    30.77% 
     5/1/98   37 Gap Inc.      51.09     59.00    15.48% 
    8/21/98   22 Schering-P    95.99    103.69     8.02% 
    6/23/98   34 Cisco Syst    58.41     62.69     7.32% 
    2/13/98   22 Intel         84.67     89.75     5.99% 
    2/27/98   27 Coca-Cola     69.11     67.81    -1.87% 
     2/6/98   56 T. Rowe Pr    33.67     32.00    -4.97% 
    5/26/98   18 AmExpress    104.07     85.69   -17.66% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     75.94    20.25% 
    3/12/98   20 Exxon         64.34     72.69    12.98% 
    3/12/98   15 Chevron       83.34     79.88    -4.16% 
    3/12/98   17 General Mo    72.41     61.19   -15.49% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2557.50   $679.05 
     2/3/98   22 Pfizer      1810.58   2367.75   $557.17 
     5/1/98   37 Gap Inc.    1890.33   2183.00   $292.67 
    8/21/98   22 Schering-P   2111.7   2281.13   $169.43 
    6/23/98   34 Cisco Syst  1985.95   2131.38   $145.43 
    2/13/98   22 Intel       1862.83   1974.50   $111.67 
    2/27/98   27 Coca-Cola   1865.89   1830.94   -$34.95 
     2/6/98   56 T. Rowe Pr  1885.70   1792.00   -$93.70 
    5/26/98   18 AmExpress   1873.20   1542.38  -$330.83 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1518.75   $255.80 
    3/12/98   20 Exxon       1286.70   1453.75   $167.05 
    3/12/98   15 Chevron     1250.14   1198.13   -$52.02 
    3/12/98   17 General Mo  1230.89   1040.19  -$190.70 
                               CASH    $120.62 
                              TOTAL  $23992.00 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98