Rick's Cabaret: Keeping Abreast of Opportunity

Rick’s Cabaret (NDQ:RICK) Jun. 2, 2009 $6.52 [9:55 EST]
52-week range: $2.44 (Mar. 9, 2009) - $24.11 (Jun. 5, 2008)

Company profile by Google Finance:

Rick's Cabaret International, Inc. owns and/or operates a total of 19 adult nightclubs that offers live adult entertainment, restaurant and bar operations. Nine of its clubs operate under the name Rick's Cabaret; four operate under the name Club Onyx, upscale venues that welcome all customers but cater especially to urban professionals, businessmen and professional athletes; four operate under the name XTC Cabaret; one club that operates as Encounters; and one club that operates as Tootsie’s. The Company’s nightclubs are in Houston, Austin, San Antonio, Dallas and Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York, New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas, Nevada. The Company owns and operates adult entertainment Internet Websites. The Company’s online entertainment sites include CouplesTouch.com, NaughtyBids.com and xxxpassword.com.

While stripping, lap and pole dancing are likely to evoke some titters from the investment community, this entertainment niche is highly profitable. Sin sells. Rick’s is perhaps the best known of the publicly traded operators with a well diversified geographic mix from New York to New Orleans and Las Vegas. They offer bachelor parties in most locations at various price ranges.

Sexually oriented web-sites round out their product and service portfolio.

Rick’s showed explosive profit growth from FY 2005 through FY 2008 and saw its shares surge from $2.55 to $29.79 over that period (FYs end
Sep. 30). The past three quarters showed negative year-over-year comparisons and in the market panic this past March Rick’s shares touched $2.44 briefly before staging a partial rebound to today’s $6.52.

Here are the per share numbers from continuing operations as reported by Value Line:

Business is expected to improve greatly going forward as start-up expenses for the new Las Vegas unit and losses in Philadelphia start to turn into profits. Zacks looks for $0.63 and $1.01 for FY 2009 and 2010 respectively making Rick’s multiple < 10.4x this year’s and < 6.5x next year’s expectations. Compare those with their historical P/E levels from the chart above to get a feel for potential upside.

Here’s a five and one half month play that looks promising:

If Rick’s shares rise to $7.50 or higher [plus 15% from today’s quote]:

The $7.50 calls will be exercised.
You will sell your shares for $7,500.
The $5.00 puts will expire worthless.
You will have no further option obligations.

You will own no shares and hold $7,500 cash for your original outlay of $4,870.

That’s a best-case scenario gain of $2,630 / $4,870 = 54% in under six months on shares that only needed to go up by 15%.

What’s the static return if the shares go nowhere through expiration date?

If Rick’s shares stay at $6.52 through Nov. 20, 2009:

The $7.50 calls will expire worthless.
The $5.00 puts will expire worthless.
You will still hold 1000 shares worth $6,520.

That’s a static return profit of $1,650 / $4,870 = 33.8% in under six months on shares which did not go move up.

What’s the risk?

If Rick’s shares finish below $5.00 on November 20, 2009:

The $7.50 calls will expire worthless.
The $5.00 puts will be exercised.
You will be forced to buy another 1000 shares and to lay out an additional $5,000 cash.
You will end up owning 2000 shares of RICK.

What’s the break-even on the whole trade?

On the first 1000 shares it’s the $6.52 purchase price less the $1.00 /share call premium = $5.52 /share.

On the ‘put’ shares it’s the $5 strike price less the $0.65 /share put premium = $4.35 /share.

Your overall break-even would be $5.52 + $4.35 /2 = $4.94 /share.

Thus, RICK shares could fall be as much as 24% from the current price without causing a loss on this trade.

This is one company you may not mind doing a little market research on by making a field trip to chat with employees.

Disclosure: Author is long RICK shares and short RICK options.

Comments

[YoYoMama:]

Oh my gosh. What a headline.

Jun 03 08:40 AM