Optimistic on Rick's Cabaret, But Cautious In Short-Term

Rick’s Cabaret (RICK) has everything I look for in a microcap. I see strong earnings growth, expansion, and a lack of analyst coverage. Now, Rick’s isn’t the stock for the religious faint of heart, but Rick’s is a microcap that’s ready to take the helm in an industry that’s begging for consolidation.

Now, some people might be a little negative on the stock, but I’ve got two words for you: Eric Langdon. If you’re looking for a Harvard MBA CEO with a bunch of decision models, you’re in the wrong place. But, if you’re looking for a CEO that knows the adult entertainment business better than the back of his hand, then you’ve found the right man. I was listening to an earnings call a couple of quarters ago, and I heard music to my ears when I heard the level of detail this guy went through for a new club opening in Charlotte. This guy isn’t a hands off CEO, but he is a genius and so is his acquisition strategy.

Rick’s has impressive earnings growth. There was a point I was a little worried about their current ratio a few months ago, but I suppose that was solved by revenue from acquisitions. Everything else looks pretty financially healthy with the company. Rick’s has been catching a little flack with the rest of the small cap market, but I’m confident that Rick’s can do just as well in a recession when the exchange rate won’t be enough to save some large caps from closing up shop.

However, Rick’s isn’t a low risk asset though. Rick’s locations are still pretty low [13], so with the nature of the business, one security guard letting in a minor could wreak havoc on revenues. However, I think this risk will shrink as Rick’s continues to expand its locations. I don’t really like the common shares dilution that’s taking place, but they don’t really have much of a choice because the interest rate on a loan for them would be outrageous. I’m not as worried about the company expanding too fast anymore, but it’s still something to keep an eye out for.

Due to acquisition related expenses, I’m also a little concerned about earnings this quarter which will be announced today, so holding off on purchasing Rick’s might be a smart move. I’m also reading about some possible club closures due to a local government’s religious revival in the company’s Houston base of operations. Investors in companies like Rick’s have a sell first and ask questions later attitude, so you would be playing it smart to hold off buying, put Rick’s on your watch list, and potentially save a few bucks. I was originally planning to sell and buy lower, but as I look into this, I’m starting to see even more of Langdon’s genius that may come out in the earnings call. I’m going to hold onto the shares I have, but I certainly can agree with anyone waiting until after the storm to buy about two months from now.

Disclosure: Author has a long position in RICK

RICK 1-yr chart