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Strip bar Gentlemen's club operator VCG Holdings Group (PTT) has been one of the top performers on the Amex recently, nearly quadrupling over the past 90 days.

Last Wednesday, VCG announced bullish revenue, earnings and cash flow guidance, not only for 2007, but for 2008 and 2009 as well. It estimates that earnings per share will grow from $.04 (trailing twelve months) to $.97 in 2009. That's a lot of lap dances! Here are the details:

The estimated total consolidated revenue for the fiscal year ending December 31, 2007 is $40.8 million, the estimated total consolidated revenue for the fiscal year ending December 31, 2008 is $66.3 million, and the estimated consolidated revenue for the year ending December 31, 2009 is $92.0 million. The Company estimates that the fiscal year ending December 31, 2007 net income to be $8.6 million, or $0.50 per share, estimated net income to $13.2 million, or $0.72 per share, for the fiscal year ending December 31, 2008, and estimated net income to $18.2 million, or $0.97 per share, for the fiscal year ending December 31, 2009. The estimated net income for the year ending December 31, 2007 includes income tax expense lower than the normal rate because of net operating loss carry forwards and tax credits forward and the affect of these factors is approximately $0.12 per share.

The Company also estimates its income from operations to be $11.7 million for the fiscal year ending December 31, 2007, estimates its income from operations to be $22.2 million for the fiscal year ending December 31, 2008, and estimated income from operations to be $29.7 million for the same period of 2009. Net operating cash flow, defined as income from operations plus depreciation and amortization, is estimated to be $13.0 million for the fiscal year ending December 31, 2007, $24.2 million for the fiscal year ending December 31, 2008 and $32.5 million for the fiscal year ending December 31, 2009.

I'm not sure how VCG can reach that degree of precision with any confidence. Most companies with full size finance departments and rock solid financial controls can't predict their own revenues, income and cash flow with any degree of consistency more than a quarter out, so how can VCG predict rapid growth down to the decimal point over the next twelve quarters?

Related party transactions also give me pause. The business plan for VCG is basically to take over clubs that are now privately owned by majority shareholder and founder Troy H. Lowrie. Virtually everything this company announces is a related party transaction (here is the latest). That is a huge red flag in any company. Here it also raises questions about the core business strategy. If the strip clubs have such a promising future, why is Lowrie effectively selling a large interest in them to public shareholders?

ptt

Bottom Line: I'm staying on the sidelines. It is way too late to get long, with too much future growth already baked into the stock price. The short side is tempting, and might be worth revisiting if Lowrie begins to sell shares.

Disclosure: Author has no position in PTT.

Source: Raising Red Flags On VCG Holdings' Bullish Guidance