onurdongel
The following segment was excerpted from this fund letter.
RCI Hospitality (NASDAQ:RICK)
As I’ve said before, a frustrating element of today’s market environment is having to watch one of our businesses perform brilliantly quarter after quarter while the stock price either declines or barely reacts to positive operating results. RICK continues to perform well in both their nightclub and Bombshells segments, with their recent 11-club acquisition set to contribute nicely to both the top and bottom line during FY22, while Bombshells growth will continue as the company expands both corporate and franchise locations.
In January, RICK stock reached an all-time high of $92/share, only to decline nearly 50% to today’s price as macro concerns dominate the mood and capital flows away from retail, consumer discretionary and restaurant stocks. While RICK’s industry/sector is a tough one for many investors to wrap their heads around owning right now, I believe the company is being unfairly lumped into the broader restaurant and consumer discretionary categories while being compared with weaker and less attractive peers.
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 provide significant advantages. The business has pricing power on both the service and alcohol sides, has assets to monetize, and is on a mission to acquire another $20mm of EBITDA by 2023 via accretive M&A where they serve as the buyer of choice for mom-and-pop nightclub operators.
Should they achieve this goal, shares would be trading at around 5x next year’s EBITDA making RICK one of the cheapest stocks in the entire restaurant universe. This isn’t lost on management, who are repurchasing shares hand over fist at a high free cash flow yield while the stock trades at unreasonable levels.
Keep in mind, this is a business that not only survived COVID and the shutdown of their entire operating base, but actually generated positive cash flow during the period. Sin stocks typically do well during economic downturns, as do businesses that provide the cheap form of entertainment that can be found in alcohol.
I’m confident that when investors are ready to own these types of stocks again that a growing, cash flowing, share repurchasing, competitively dominant business trading at less than 5x EBITDA will look very attractive.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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