Hedge Fund's Adult Education

Eric Wold, an analyst with Merriman Curhan Ford, who is bullish on the stock, says he doesn't know what Steel Partners is up to. He says New Frontier may have authorized a share-buyback program last year in an attempt to keep Steel Partners happy.

He suspects, however, that Steel Partners and the other hedge fund investors simply see New Frontier as an undervalued stock with about $1 a share in cash on its balance sheet and the potential to generate $26.3 million in EBITDA, or earnings before interest, depreciation and amortization, in the coming year.

EBITDA, sometimes called cash flow, is an oft-used metric for measuring the fiscal strength of a media company with high amortization and depreciations costs. In a recent report, Wold argues that after New Frontier's recent acquisition of MRG Entertainment, an erotic-films production company, it makes sense to start valuing the company like other traditional media companies.

But compared to Playboy, its main competitor in the adult-entertainment business, it's not clear that New Frontier is so undervalued.

Shares of New Frontier, based on future earnings, trade at a price/earnings multiple of 15. Playboy has a comparable PE of 14.6. New Frontier's shares trade at 3.4 times its current sales. Playboy's price/sales ratio is 1.

In fact, one hedge fund manager, who didn't want to be identified, said he once was invested in both New Frontier and Playboy, but bailed out of the space because he's not certain how profitable it will be.

For now, at least, that's a judgment Lichtenstein and Steel Partners don't seem to share.