Greystone Capital Management, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +45.7% was delivered by the fund’s median account for the Q1 of 2021, ahead of its S&P 500 and Russell 2000 benchmarks that delivered a 6.2% and 12.7% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Greystone Capital Management, in their Q1 2021 investor letter, mentioned the SPAC, Mountain Crest Acquisition Corp. (MCAC) that merged with PLBY Group, Inc. (NASDAQ: PLBY), and shared their insights on the company. PLBY Group, Inc. is a Chicago, Illinois-based media company that currently has a $1.9 billion market capitalization. Since the beginning of the year, PLBY delivered a massive 305.68% return, impressively extending its 12-month gains to 396.00%. As of April 27, 2021, the stock closed at $52.13 per share.
Here is what Greystone Capital Management has to say about PLBY Group, Inc. in their Q1 2021 investor letter:
“Mountain Crest Acquisition Corp. (MCAC) / Playboy Enterprises (PLBY)
During the quarter, we entered into a mid-sized position in Mountain Crest Acquisition Corp., a SPAC that during late last year inked a deal to merge with Playboy Enterprises (yes, that Playboy) and take the company public. The deal was consummated in February and shares now trade under the ticker symbol PLBY. In line with my occasional attempts to exploit investor biases, the stigma surrounding the Playboy brand especially as it relates to the legacy magazine business helped create the opportunity to purchase shares for what appears to be an incredibly favorable valuation. This is one situation where a SPAC IPO benefitted us greatly as I believe if Playboy underwent the traditional IPO process including roadshow and investment bank involvement, shares wouldn’t have been available anywhere near our initial purchase prices which consisted of an absurdly low EBITDA multiple following the deal close.
While the market may be forward looking in how it perceives and values companies, it seemed difficult for investors to overcome the past of Playboy, likening it to a money losing dead brand whose primary customer base consisted of ‘boomers’. When we started buying shares, it seemed as if the Playboy brand had no shortage of non-believers (some earned, some not so much), but in my opinion, Playboy is one of the most recognizable brands in the world with a rich history that should continue to be monetizable. I believe the management team has set themselves up for the post-Hugh Hefner/magazine era much better
than the market is giving them credit for and in a way that will showcase their brand strength and various paths to monetization that are nearly 75 years in the making.Playboy was founded by Hugh Hefner in the 1950s, and while I don’t need to dive into the rich history of the company nor their exploits, I can assure you that we are not investing in the same business that allowed your fathers and grandfathers to amass a collection of magazines with or without their wives’ permission. Today, Playboy operates four consumer product categories with large, fragmented markets and no clear channel leader. With a licensing business bringing in high margin contracted cash flows of over $400mm through 2029, the focus will be on growing the direct-to-consumer segment to drive new customer growth while leveraging the near 50 million social media followers behind the brand. Accretive M&A and higher take rate licensing deals will be the focus and given the large cash balance following the close of the Mountain Crest deal, and team of M&A savvy managers with backgrounds in all things brand management and licensing, I’m optimistic about what the company will be able to achieve.
Leading these efforts is CEO Ben Kohn who has already flexed his M&A muscles by acquiring Lover’s chain of sexual wellness stores as well as e-commerce retailer Yandy.com for low multiples of revenue in order to complement Playboy’s organic growth. Kohn has been involved with Playboy for over a decade (following private equity group Rizvi Traverse’s efforts to take Playboy private in 2011) and has lived through two CEOs, legacy family issues and the decline of the publishing business. Similar to our investment in Whole Earth Brands, this is a good example of a business that is now freed from the shackles of a prior Founder/Chairman and will be able to direct cash flow (previously being spent on keeping the publishing arm alive) to higher value initiatives. Moving forward, the group will be able to use stock as currency to make additional acquisitions at a low cost of capital.
In the hands of a capable management team there are many paths for Playboy to monetize their brand, and examining case studies such as Authentic Brands Group, a private brand management, licensing and lifestyle business, one can see that the strategy of complementing a cash flowing licensing arm with a direct-to-consumer retail offering has been executed before. By following the playbook of monetizing young and legacy brands by leveraging retail footprints against large social media followings, Authentic has been able to buy and monetize over 50 brands to the tune of $10 billion in revenue. ABG’s licensing
brands among others include Elvis Presley and Marilyn Monroe, who have demonstrated the long-life cycles of older iconic brands with historical archives of intellectual property similar to what Playboy brings to the table.One of the things that really jumped out at me following the release of Playboy’s stellar Q4 / FY20 results was measuring that performance against management’s guidance of 2025 revenues and EBITDA of $296mm and $100mm. Playboy reported revenues of $148mm for FY2020 (including a guidance for over $200mm revenues for FY21), and adjusted EBITDA of $28mm. Revenues grew 89% year over year. If PLBY is able to reach the $200mm revenue mark during 2021, and if management’s guidance is to be taken seriously, that leaves four years to reach $296mm in revenues, or $24mm per year, assuming zero revenue growth moving forward. Hardly aggressive expectations for a business that posted $46mm in revenues
during Q4 alone and grew revenues nearly 90% year over year. With a war chest of cash for the new management team, who again, are no longer tied to the legacy business, for the first time in the company’s post-Hugh Hefner history Playboy has the resources and willingness to deploy capital into things like marketing and M&A. I would say there’s a decent chance the 2025 guidance ends up looking conservative.At more normalized growth rates, the cleanup of old licensing contracts, new business wins and additional M&A, I believe we could see PLBY finish 2025 with over $400mm in revenues, and with their guided 30% adjusted EBITDA margins would deliver over $120mm in adjusted EBITDA, putting the current valuation around 4x EBITDA. Next year’s projected EBITDA multiple sits around 12x, a valuation that in my opinion doesn’t factor in growth, management or M&A. I believe the core business potential as well as massive optionality should provide an opportunity for decent returns moving forward.
PLBY Update
Toward the end of Q1 / beginning of Q2, PLBY stock ripped higher as the company continues to beef up their IR efforts, communicate the story and showcase CEO Ben Kohn and his business strategy. In addition, Kohn recently mentioned entering into potential non-fungible token or ‘NFT’ deals using Playboy’s old content archives, which further caused the stock price to increase as one such deal was announced in the beginning of April. My ability to quantify the potential impact of such a development is limited at this stage, and the share price has gotten somewhat ahead of my expectations for business growth and potential moving forward. In other words, the wide mispricing I initially saw has begun to correct itself, and with shares more than tripling from our initial purchase prices, I have started to trim the position in line with my risk management criteria.”
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Our calculations show that PLBY Group, Inc. (NASDAQ: PLBY) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. PLBY delivered a decent 166.11% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.