Robert Christopher's  Instablog

RICKS CABARET INTERNATIONAL

(RICK-NASDAQ)

05/16/2012

STOCK PRICE = $8.53

$(MIL.) Fiscal Year ending September 29th

2011……………………………….. Revenues were $83.5. EPS was $0.78.

2012Estimate……………………Revenue Estimate $87.2. EPS Estimate $0.72E.

2013Estimate……………………Revenue Estimate $95.1. EPS Estimate $0.91E.

The story here is my projected Sales figure of about $100 million in the next three years, which should generate my estimate of about $9.1 million in Net Income and my estimate of Net Cash Flow of about $4.0 million. Assuming a growth rate of my estimate of 13% and assuming a Cost of Equity Capital of 15%, the $4.0 million in annual cash flow could discount, using Discounted Cash Flow analysis, to a Net Present Value of $200 million on 10 million shares, or a stock price target of $20 per share. A price target of $20 per share in the next three years would agree with its history, closing at $26.92 on 12/03/07. Based on my projections above, I believe this stock potentially could be a double in the next few years.

Ricks is seeking to build a super strong franchise, with its base in Texas, but also with a presence in major cities with professional football teams. Acquisitions of single clubs in markets geographically removed from other clubs has been discouraged, since the Las Vegas addition of a single club to the Ricks family proved unsatisfactory and was closed. Despite the fact that the Las Vegas business environment has suffered with the economic downturn, Ricks chose to enter this market. I can only speculate that problems particular to this club were deemed to be too much of a drain on time and a drag on overall portfolio performance. Plans for future revenue growth would emphasize the following: Purchases of multiple clubs in a single deal; Building construction of new clubs from the ground up; Acquiring single clubs to add to an existing cluster in a major metro area; and Generating more sales from existing clubs.

Ricks currently has 23 clubs on about $87 million on trailing 12 months revenues, or about $3.8 million per club. To generate the $3.8 million in revenues, one way to look at this would be to propose that each club would produce about $10,400 in sales per day, 365 days per year. From my own experience with nightclubs in Blacksburg, VA, I know that a single club could have about 10000 square feet. Using this as a baseline for square footage, without knowing any exact dimensions, each square foot would have to generate $1.04 per day in sales, in order to get to $3.8 million in annual revenues per club. If you take the focus off efficient use of space and put the spotlight on the customer, you would need 150 businessmen spending about $70 each on a daily basis to reach $3.8 million in annual sales. This is the status quo as I write, which would be the case in a major city with a strong business environment and big male dominated party scene after every football game. I'm all for it! Assuming Ricks has its formula right for knowing where to put a club, the next priority would be how to maximize revenues at a specific club or in a given market. Of course, the answer is effective advertising and excellent customer service. Ricks provides high quality adult entertainment and food and bar service in an upscale environment. It is interesting that Ricks is careful not to allow a club to become too loud, so as to encourage business movers and shakers to transact large business arrangements among themselves, right there in the club.

The social appropriateness of adult entertainment has come a long way in the last 100 years. At the present time, an adult entertainer is likely to be a very bright college student, or even someone with a Masters Degree, or possibly someone who plans to have credentials. Alternatively, you might meet a down to earth, rock solid, single mother who is raising a child. In this light, exotic dance can almost be viewed as a competitive sport. Exotic dance is a performance, and you need to work hard at it, and put everything you've got into it, if you want to make a lot of money. The important distinction here is that Exotic Dancers are perfomers, and they deserve a lot of respect. I've heard it said that Dancers are going to hang out with Dancers, and I do believe that's true. While they're all creative and different, all Dancers tend to have some similar characteristics. Once it's in your system, you may become a lawyer or anything you want, but that stage will still grab you like a magnet. By the way, there are some beautiful Exotic Dancers in their 50's and beyond; so, I wouldn't count anyone out just yet!

The current share price is within its 52-week range of $6.06-10.50, and approximately at its 200-day moving average of about $8.35, but the share price has backed off its 100-day moving average of about $9.30. It is presently trading at a P/E ratio of about 11.68X, on Trailing 12 Months Earnings per Share of $0.72. Fundamental ratios include a Return on Assets of about 7.51% and a Return on Equity of about 11.22%. The stock's beta is shown on Yahoo Finance at 1.80. Based on its charts alone, RICK looks reasonably valued in the market, although this stock has been relatively volatile in the past with respect to major market moves, as its Yahoo Finance beta of 1.80 would indicate.

At the present time, RICK tends to be valued in the market at about one times Sales per Share, which would be consistent with projected sales for FY 2012, ending 09/29/2012, in the ballpark of about $87million on about 10 million shares. Assets are roughly $150 million; so, we are looking at a Sales to Assets ratio of somewhere around 60%. Net Income for FY 2012 should come in at around 8.2% of about $87 million in projected Sales, I'm guessing, or about $7.2 million, or about $0.72 per share on about 10 million shares. In other words, my FY 2012 Earnings per Share Estimate is equal to its trailing 12 months EPS, currently at $0.72.

Robert Christopher

APPENDIX:

D I S C L A I M E R

Neither the author of this report (the analyst) nor his family own or beneficially own any shares of common stock, investment securities or have any other financial interest in Ricks Cabaret International. The analyst was not compensated by Ricks Cabaret International or any interested parties thereto for writing this report.

Although some information contained in this report is derived from sources believed to be true, I make no representation as to the truthfulness, correctness or accuracy of anything written in this report, and this report contains opinion and even speculation, as to the report as a whole, as well as in various statements and implications made herein. Furthermore, all information and representations made in this report are subject to change without notice. Neither this report nor anything written in it are to be construed as investment advice, and nothing written in this report is to be considered a recommendation or solicitation to purchase, hold or sell securities. Finally, I make no representation as to the suitability or appropriateness of the company described herein to any particular financial purpose. Any prospective investor must do all of his own due diligence and consult with his own financial services professional, as to the nature, suitability and appropriateness of these shares to possibly fit any suggested purpose.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.