NEW YORK (CNNMoney.com) — Sex sells. Or does it?

Playboy, the company known for its flagship magazine featuring a bunny logo and centerfolds of naked women, “adult entertainment” television programming and lavish parties at founder Hugh Hefner’s mansion, hasn’t been much of a turn-on on for Wall Street lately.

Playboy’s magazine publishing division is struggling. Advertsing revenue is way down, and the publishing unit posted a net loss in the first nine months of 2006.

Shares of Playboy fell nearly 18 percent in 2006 and so far this year have dropped another 7 percent. It’s enough to make Playboy investors want to hide beneath one of Hefner’s trademark velvet smoking jacket robes.

And the stock’s poor performance has some calling for Playboy to make some drastic moves, possibly even a sale of the company.

The company’s fundamentals during the first nine months of 2006 were hardly scintillating. Overall sales fell 1 percent, and the company reported a net loss of $1.4 million.

Revenue from its domestic TV business, which accounts for more than a quarter of the company’s total sales, slid 16 percent because of lower cable and satellite TV pay per view sales.

The company’s publishing unit, like many other magazine companies, is struggling as well as more and more readers and advertisers are flocking to the Internet.

Total publishing revenues fell 10 percent during the first nine months of 2006, with advertising sales plummeting 22 percent. Publishing accounted for nearly 30 percent of the company’s sales in the first three quarters of last year, but the division posted a net loss of $4.9 million.

Playboy will release its fourth-quarter and full-year results on February 13. And analysts aren’t expecting much improvement.

According to consensus forecasts from Thomson First Call, Wall Street predicts that the company will report sales of $93.1 million, up 2 percent from the same period a year ago, and earnings per share of 12 cents, a 14 percent decrease from the fourth quarter of 2005.

Michael Kelman, an analyst with Susquehanna Financial Group, said that the biggest question mark facing Playboy is its domestic TV business. He said that the company is shifting to a subscription video-on-demand strategy as opposed to individual pay per view movies.

Playboy has agreements with the top two cable companies, Comcast (Charts) and Time Warner Cable, to offer the video-on-demand service. Time Warner Cable, which like CNNMoney.com is owned by Time Warner (Charts), has yet to roll out the service, though.
Getting in the skin game

But the problem facing Playboy, Kelman says, is that the cable companies are often reluctant to tout adult entertainment channels aggressively. “There is often little marketing support for adult content from the cable operators.”

Kelman adds that Playboy is facing tougher competition in video from New Frontier Media (Charts), which operates adult entertainment channels known as the Erotic Networks.

The two bright spots for the company are its digital business and licensing operations, both of which are growing rapidly.

Revenue from online subscriptions and e-commerce increased 20 percent during the first nine months of the year. On Friday, Playboy announced that is creating a DVD box set that will feature all issues of the magazine in electronic format.

Sales from licensing rose by 19 percent during the first three quarters of last year. And Playboy’s licensing business should get a further boost this year thanks to last October’s opening of a Playboy Club at the Palms Hotel and Casino in Las Vegas.

“People have questioned the long-term ability of playboy to survive but we think it will survive. We like the plans they have in cable and licensing and the valuation is cheap enough that not a lot has to work for the stock to rebound,” said Virge Trotter, an analyst with Manning & Napier Advisors, a Fairport, NY-based money management firm that owns approximately 180,000 Playboy shares in its Manning & Napier Small Cap Series fund.

But despite this, David Miller, an analyst with Sanders Morris Harris, downgraded the stock last week to a “hold” and wrote in a research note that “sound fundamentals in licensing” are “not enough to make up for tough conditions in publishing.” He added that “many investors are losing patience” in the company’s shift to subscription video-on-demand TV services.

Because of the company’s woes, some have begun to suggest that Playboy could be an attractive takeover candidate for a leveraged buyout.

Mark Boyar, president of Boyar Asset Management, an institutional investment firm that owns 292,700 shares of Playboy according to FactSet Research, said after the company’s last annual shareholder meeting in May that the company should consider a sale.

Private investors have been circling media companies for the past year, and several prominent firms have been bought through an LBO, in which a company uses debt to finance the purchase.

Radio station operator Clear Channel Communications (Charts), Spanish language broadcaster Univision (Charts) and magazine publisher Reader’s Digest (Charts) have all agreed to be taken over during the past year.

In fact, when CNNMoney.com wrote last November about media companies with sluggish but steady growth prospects and healthy balance sheets that could appeal to private equity firms as leveraged buyout targets, Playboy made the list along with The New York Times Company and Meredith Corp.

But a big obstacle to a sale would be whether or not the Hefner family (Hugh’s daughter Christie is Playboy’s chief executive officer) would agree to it since the Hefners own a majority of Playboy’s voting-class shares.

“With regards to a leveraged buyout or management buyout, the idea’s certainly kicked around when the stock is hit. But it’s all up to the Hefner family since they control 70 percent of the vote,” said Kelman.

And Sanders Morris Harris’s Miller said in an interview that he did not think the Hefners are interested in selling out.

“We always find it amusing that every time operations at media companies falter compared to expectations, people who still like the stock subscribe to this notion that the company is going to be taken private,” he said.

“Playboy needs to be public as a way to reward employees with stock options. You can’t do that when you’re private. We don’t really see this speculation as something to take seriously in the near-term,” Miller added.

Manning & Napier’s Trotter is even more blunt regarding the prospects of a takeover.

“I don’t think a sale will happen as long as Hugh Hefner’s alive,” he said.