Rick's Cabaret: Rated "R" for Returns on Adult Entertainment

Rick’s Cabaret International (RICK) is a stock that has tripled in 2007, and 2008 may possibly see even more upside. With 15 adult entertainment clubs, valued at $162M, the company is aggressively seeking and forecasting growth. The stock is trading around 40x trailing twelve month earnings, and for good reason. The CEO has said 2009 EPS will hit $2 per share. The stock closed today at $22.25.

While 2009 is still 2 full fiscal years away, the trend on the revenue graph makes it look possible. The founding owner and CEO, Eric Langan has been in the adult entertainment his entire life. Eric Langan sounds like the “I can do anything I put my mind to” kind of gentleman. His biography is an interesting one, and can be seen here. They cater to the “high end” gentlemen, according to the summary of their business model.

While the prospects and future look great according to the CEO and all the chart trends, let's examine the downside risks with this stock, at least besides the obvious of “Rick’s” not meeting guidance.

The first is the inconsistencies in profitability over the last 10 years, especially during a bear market. Under the assumption that 2008 could be a year for the bear, Rick’s is not likely positioned too well (Or maybe they are, I don’t know). Most of the clients are men with fast money; Eric says himself “1/3 of clients” are from Wall Street. Other clients include athletes, entertainers or entrepreneurs counting chickens too soon.

In a bear market quick money doesn’t last too long. While it’s likely athletes will always need strippers, investment bankers are not rolling in Christmas bonuses nor being recruited in droves. Support for this hypothesis lies in the ROE during a year when both VC funding completely dried up and a the worst bear market seen by “Rick’s” was about to end, 2002. ROE was -26% and they lost just as much per share as they made in 2007. There is lots of information available in SEC filings on what happen in 2002, including likely some organizational adjustments and 20/20 type mistakes.

Although for the last 2 years, margins have been great, and ROE saw the mid teens for both 2006 and 2007. Profitability is exploding, as is the stock. It’s quite possible the company has a completely new face and strategy now than they did in 2002, even management claims the revenue surge was from the success of one specific location, “Tootsie’s”. One thing is for certain, the decisions of management will be under full scrutiny in the next few years.

The bottom line is, the stock has a tremendous upside from these levels, even if most things go as planned from this point forward. That is, the capital markets need to find a bottom quick and management needs to successfully navigate through treacherous legal waters and acquisitions.

Disclosure: No position in RICK

Comments

[Manifest]

Eric Langan gives a whole new meaning to "played in Peoria."