Here is my cold look at [[RICK]] in an attempt to see if it is worth buying at 27. My old 2008 target was 35.

First, its revenue growth YoY was 30.7% in fiscal year 2007. This is important because the CEO said he expects an acceleration, so if that were to be true, 30 is a fair P/E multiple to slap on out years since it doesn’t reflect RICK’s peak revenue growth. Using the guidance of $1.03, I can see $30.9 becoming a reality, but that is less enticing when buying at 27 odd.

It is worth noting that this is the “as-is” guidance. The company has already announced that it plans on doing additional accretive acquisitions and will update guidance at that time, which makes this company cheaper than it appears. They could easily in January come out and say, “Bam!, $1.30.” Meaning we’d be at 39. Shitballs, in that hypothetical, $27 is great! The service industry, whose growth rate pales in comparison, trades at 21x. Based on that metric, 40x is still acceptable for RICK, though that would be stretched. The 2009 estimate is $1.70, so today it is 16x that estimate.

RICK says it plans to acquire more high end spots at 3-6x EBITDA in 2008, or as additional opportunities pop up. There was no EBITDA estimate for 2008, but I estimate that RICK is at 20x EBITDA. Another way to look at it, is that the company is worth 3.3x the upper end of their buy range. Not bad considering the growth and capital resources.

Pretty enticing thus far.

The money situation for RICK is the acquisitions. It plans on doing a lot more, fueling growth. From what the CEO is saying, I believe it can attain 130m in revenues in 2-3 years (54m –> 80m at existing clubs, + 5 x $10m acquisitions over 3 yrs).

That would put them at…well…a real high price ($80?). Mgt. is looking only at profitable, established clubs generating 10m revenues a year plus. The CEO estimates that there are between 75-200 clubs this size, and he wants to do about 3 per year. When the company announced the Tootsies acquisition, the stock added almost 50% in the following weeks––the same amount the acquisition is accretive to EBITDA. It makes sense that future acquisitions may garner similar market responses, especially if they are going to be larger than the Tootsies buy. Management has also stated intentions to increase prices in some clubs, pushing the already plush margins higher.

If you’ve made it this far, perhaps you know of RICK, but still aren’t sure exactly what RICK does. Unless you’re Ray Charles, you know it is a strip club––but it’s really so much more than that.

Unlike the shithole “Wednesday Night Special” clubs you attend where the girls dance to Prince’s “When Doves Cry,” RICK specifically caters to “professional athletes, urban professionals, and affluent businessmen.”

So basically, the owners have designed a Rapper’s paradise for horny, cash-rich athletes, the higher-up drug dealers around the city, and shady mob bosses. How can you not invest in a place like that? How?I could write a book.

• It only hires choice girls and requires them to have excellent people skills, both in the figurative and literal sense. With the exception of one club, all the dancers are independent contractors. God that is a genius strategy––no withholding or taxes.
• It has a first class bar, and employ restaurant quality chefs, with a full lunch and dinner menu.
• It has adequate internal controls in my estimation to protect the cash intensive business. It segregates cash duties, and reconciles accounts daily. Independent internal audits are conducted monthly.
• It’s building new clubs off new freeway off-ramps to fuel growth.

Back to the valuation, vis-á-vis borrowed money. They borrow cash to buy clubs to fuel growth. Got it?

RICK had more debt than I would like to see, otherwise this story is near golden. It is clear it uses this leverage to expand operations, as most of it’s acquisitions are purchased with debt, some portion of which is convertible. Proceed with caution. Here is RICK’s exact view, and I see no need to paraphrase it since they say it well here:

So there you go. My first take is “Wow, that sure seems like a lot of debt.” I decided to check the only publicly traded competitor [[ptt]] to see if RICK’s explanation was a shared sentiment in this industry.

It turns out this is relatively normal, and RICK’s debt levels are far better than PTT’s. It seems to have had a lot of debt for years, and comparatively, is doing better. You can see in the chart though that 2009 is going to be the most expensive year, and that will have to be considered in estimates. Although tier-three, PTT looks good at first glance for similar reasons to RICK––though RICK is first-tier.

PTT:

• Current Assets 9-30-07: 4.7m
• Current Liabilities: 13.1m, 11.2m of which is the current portion of PTT’s LT debt.
• Cash: 2.7m
• Total Long Term Debt: 20.53m
• ~50% of Revenue is alcohol sales, compared to RICK at 37.5%
• PTT is growing at 39%, and is valued at 15.3x 2008 estimates, but has a larger amount of debt, a worse product mix, and crappier locations. They have a similar business model, with the acquisition idea––but are homo.
• RICK is growing at 110% and is kickass.
• RICK’s LT debt is 11m, ST 5.4m, of which 3.2m is the current portion of LT debt. Cash on hand is 2.9m, with interest expense for the period of 1.3m.
• PTT management said the same thing in regards to the seemingly high debt level––the business is so predictable that they can leverage aggressively. Two teams agreeing is more right than one at least, however suspect.
• Below is from PTT’s powerpoint. Louisville? Please. RICK is high-end, and much more resistant to a slowdown. Despite economic hardship, even these “inferior” cities grew steadily. A nice backdrop for tittie growth.

RICK is fueling it’s growth by acquisitions––not a bad plan in a fragmented industry in need of consolidation. Conceivably, what it is doing is duplicatable to a much larger degree, providing that management is adept and no Angelo situations arise. Acquisitions, revenues, and earnings could keep on trucking for another 5 years.

• Eric Langan, the CEO of RICK, owns 5% of the shares, with an option to buy a shitload more. Fool is 39––which means he is just spry enough to ride this baby out––to a much higher share price. If he has the balls for it.
• 10% owner Jeff Feinberg bought 83K shares at $21.40-21.97

My final call on RICK? I am sure I love the business. I love tits. I am sure that they have momentum. I am satisfied with their financial position. I am not particularly concerned about the value, but if you were gonna add at 27.xx, it seems far along, but that could be because I bought it at 10.97. Anything in the low to mid 20s is an ideal entry.

I think this was a thorough but still incomplete analysis. I could have spent a lot more time on internal ratios, trends, and how everything compares to PTT, etc, but for my purposes, it answers the question: is RICK expensive? I think RICK is approaching full value, as long as NO new acquisitions are announced, and it remains a compelling growth story. Should the new estimates upon any subsequent acquisitions be dramatically higher, then I expect the stock to react in kind.

I would be careful chasing this one right now, especially tomorrow if it runs further, as it will pull back––they always do. That said, it has the potential to go much higher based on both fundamentals, or sheer momentum. It is entirely possible that with new guidance the stock could become fundamentally cheap. Not to mention the impressive LT prospects of the business––buying baller-ass clubs and making a nice margin. Glorious.

The story is not well-known on Wall St. and the small float will be much more expensive once it is. If it can sustain its growth rate for as long as management believes, this could make for a lucrative investment going forward, even at this price.

I’ll pay rent at this club.