The following segment is taken from this funding letter.
RCI Hospitality (NASDAQ:RICK)
As I’ve said before, a frustrating part of today’s market environment is having to watch one of our companies perform brilliantly quarter after quarter as stocks the price drops or barely reacts to positive operating results. RICK continues to perform well in both its nightclub and Bombshells segments, with its recent acquisition of 11 clubs expected to contribute well to both revenue and net income in FY22, while Bombshells’ growth will continue as the company expands its corporate and franchise locations.
In January, RICK stock hit an all-time high of $92/share, only to decline nearly 50% from today’s price as macro concerns dominate the mood and capital s away from retail, consumer discretionary and restaurant stocks. While RICK’s industry/sector is difficult for many investors to understand at this time, I believe the company is unfairly lumped into the broader Foodservice and Consumer Discretionary categories while being compared to peers weaker and less attractive.
So why would we want to own RICK? In terms of navigating the current or potential economic environment, RICK’s variable cost structure, balance sheet and access to capital offer significant advantages. The company has pricing power on both the services and alcohol side, has assets to monetize and is on a mission to acquire an additional $20 million in EBITDA by 2023 through mergers and accretive acquisitions where they serve as the buyer of choice for mom-and-pop nightclub operators.
If they hit that target, the shares would trade at around 5x next year’s EBITDA, making RICK one of the cheapest stocks in the entire restaurant universe. This is not lost on management, which is buying back shares in spades at a high free cash flow yield as stocks trade at unreasonable levels.
Keep in mind, this is a company that not only survived COVID and the shutdown of its entire operating base, but actually generated positive cash flow over the course of of the period. Sin stocks generally do well during economic downturns, as do companies that offer the cheap form of entertainment that can be found in alcohol.
I am confident that when investors are ready to hold these types of stocks again, a growing, cash flow, buyback and competitive business trading at less than 5x EBITDA will be very attractive.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.