Yaron Naymark From 1 Main Capital Discusses RCI Hospitality

Summary

• RICK is poised to be a massive beneficiary from reopening.
• Continued free cash flow growth driven by accretive acquisitions and Bombshells rollout.
• Significant upside as the market awards the company a reasonable multiple.

Yaron Naymark, founder and Portfolio Manager at 1 Main Capital, discusses his investment in RCI Hospitality (NASDAQ:RICK). RICK is a cash flow machine, and Yaron thinks the company is set to compound free cash flow per share at an accelerated rate for years as they continue to roll up the gentlemen's club industry at very low multiples, execute on their Bombshell's growth plans, and repurchase shares when they trade at attractive prices.

Chapters

0:00 Intro

1:55 RICK overview

10:05 Getting comfortable with the management team

18:30 Discussing the roll up opportunity

28:15 Valuation arbitrage on acquired clubs

32:25 Bombshell's growth prospects

38:50 Breaking down the ROIC for new Bombshell's

44:15 RICK valuation and SOTP

49:25 Does ESG and regulation help or hurt RICK?

51:55 Normalized FCF for RICK

57:10 Closing thoughts and adjusting for James Harden leaving Houston

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[bazooooka]

This was my near favorite Covid play from two Summers ago but still has some run left.

[Darren McCammon]

RCI Hospitality (RICK) filed an S3 registering to sell up to $100 million in shares on Friday.
www.sec.gov/...

[Darren McCammon]

If management has to wait two trading days after the S-3 posting to start selling (e.g. wait to trading days after any material announcement), today would be day three.

[knoxmarlow]

@Darren McCammon The CEO was so emphatic that he didn't want to sell equity at a 60- or 70-handle. I recall your exchange with him. It would be pretty shocking, wouldn't it, if he so quickly reversed course and agreed to sell his "equity gold" at a perceived discount?

I'm not saying that it's the wrong thing to do with the stock up 500-600% in a year. But it would undermine credibility and make it more difficult to attract broader coverage for the stock. Certainly the earnings calls feel very bush league.

[Alex Hardman]

@knoxmarlow If the equity offering isn't in connection with a major acquisition, I think most on that call will be quite disappointed. RCI really needs to disclose why they are doing the equity offering if an acquisition isn't announced in the near future. Nobody is going to complain if they are doing several $100 million dollar acquisition and a chunk of it is equity, or if it is done around the 3x EBITDA level (this would assume the buyer gave up some premium on the price for the equity).

[hokieincanecountry]

On Friday, May 14 after the market closed, the Company filed its S-3 with the SEC, accepted at 17:00:40, covering a wide range of securities (including common, preferred, warrants, units and rights) for potential issue in the future. The RICK stock set a new record high in the regular trading day (trading at $78.57 and closing at $77.58, up by 10.43% on the day). The stock traded down from this closing price in the aftermarket, which is not any surprise once this SEC filing was reported. It will likely trade down some more on Monday.

Based upon Eric Langan's comments at the conference call last week, the last thing he wants to do is to have the Company issue more equity. However, in my opinion, he also wants to be well prepared to close one or more acquisitions of large, multi-unit clubs in the next six months, and some sellers may want to obtain as part of a deal the "great upside potential" on an equity investment that RICK will now have the capability to include as part of a deal.

Good luck to all RICK investors!

[Alex Hardman]

@hokieincanecountry I would imagine it is in connection to a deal, as RCI doesn't need cash at the moment unless there was a major acquisition. I would also guess they wouldn't be doing a 100% equity deal, so the question real is how big is this acquisition? It is also possible that they sell preferred shares, which don't impact leverage ratios, but act much like debt. My guess is we will find out in the next week or so what is happening.

I remember when they announced the VCGH deal (sadly it fell through), the stock initially traded down and then rallied like 50% in the next week or so. Initial market reactions by RCI stock can be quite misleading.

[hokieincanecountry]

@hokieincanecountry Well, it looks as if I missed my call on where the RICK stock price would trade this morning. Latest trade in the premarket is $80.00 per share (up by $2.42 per share), a new record high. Well, I guess it could still turn around and go back down.

[knoxmarlow]

The call transcript is amusing, with the "largest shareholder" berating another "analyst" as "suffering from Covid delusions" or "smoking something." Management should tighten things up to improve its credibility at the margin.

I've had this on my radar for several years and it's a fish that got away (so far). Interesting podcast, thanks for putting it up.

[424270]

@knoxmarlow While the call was somewhat unusual (though not so much for RICK), I personally found that exchange to be quite helpful. It's not every day that we get to hear a large shareholder explain his precise investment thesis and force the CEO to say much more than he originally intended to say. Would you rather listen to such pearls as "what's your tax rate for the next Q" and "I'd like to ask about the cadence of your CapEx spending throughout the year"?

[knoxmarlow]

@424270 Sure, it was an interesting exchange. I understand your point. But I also don't need a large shareholder extemporizing at length during a conference call. If he wants to ask questions, let him frame the questions and ask them. If he wants to act like a 10-year old suffering from a wedgie, please take it offline.

The stock price is on fire. But management is making a long slow appeal for market credibility. And letting your conference call degenerate into name calling is not super professional.

[Alex Hardman]

@knoxmarlow Let me just start off, I am not an analyst, just an individual investor who has followed RCI for a very long time. The exchanges Eric has with Adam do definitely offer a lot of info and insight. But it definitely sucks to be the focus of someone's tirade. Especially when I was using what I was assuming were the numbers RCI used to make buyback decisions. But looking at the 10q for Q1, I was clearly over optimistic, as they didn't do any buyback at the $30/share price. My assumption was they were using $40m FCF run rate for capital allocation decisions and $30/share is less than $30m. Ironically, Adam and myself are pretty much asking the same question, "Why doesn't RCI be more aggressive with the buyback?" Adam assumes an $8/share FCF or $72m in 2022, though management doesn't appear ready to publicly guide to that number or make buyback decisions on it at the time of the last call.

[firsTraveler]

They have a huge exposure to oil regions in Texas.

[alexalekhine]

@firsTraveler and your definition of huge is?

[Dipset32]

@firsTraveler That is completely false, unless you call major cities "oil regions," just because they happen to be in Texas.

Either way, the economy in Texas is doing far better than most of the country.

[firsTraveler]

@Dipset32 You have a much sunnier outlook for USA oil/gas production then I do.

[emacd]

This one has run up a lot in the last year but still has room to run. Long Rick.

[alexalekhine]

@emacd run up alot? Its double its pre-covid high. And then some.

[firsTraveler]

@emacd I sold half my position for 12x my cost bases.

[Chris DeMuth Jr.]

But how much due diligence did you do on the ground?