RCI Holdings, formerly Rick’s Cabaret, (RICK) is one of my top holdings in the Aspect Large Cap Value Fund. The company is the leading publicly traded “adult entertainment” stock and has more than 40 clubs nationally.
The chain’s recent quarterly report was interesting. In my opinion, management may be preparing the company for either a major restructuring or perhaps taking the company private. You’re either growing or you’re shrinking, as they say. And based on CEO Eric Langan’s comments, I can’t help but think that RICK is looking at all of its options.
For the past several years, if you overlooked the fact that RICK is in a controversial “sin” type of business, the stock has become dirt cheap. Even with the new guidance of 15% to 20% growth, RICK is trading at something like 10x earnings.
In order to unlock value in the shares, management has been exploring the creation of a REIT which will unlock the value of the real estate that RICK owns, potentially benefiting shareholders to the tune of $30 million to $40 million.
For a company with essentially 10 million shares outstanding, that could be significant, perhaps $3 to $4 per share. Eric Langan also recently stated that he would be a buyer of shares up to $15, a pretty bold statement considering that the shares are currently trading around $11.60.
Here’s the thing: The company has been talking about this for almost a year now, and there were many people who thought that we would be getting a lot more detail on the REIT by now. On the recent conference call, Langan seemed to push the REIT off at least another six months while also stating that there are no additional acquisitions in the pipeline right now.
He also stated that they would be buying back stock and paying down debt opportunistically. To me, this seems like someone who is not willing to take a lot of short term execution risk, but for those of you familiar with Eric Langan, it seems out of character.
While there are those who believe that RICK management is incompetent, I would remind them that Eric Langan started RICK with capital he raised by selling his baseball card collection. If anyone else has a baseball card collection that was worth enough to start a strip club, please stand up.
In addition, if anyone else can parlay a baseball card collection into a $100 million company, I would like to give them my money to invest as well. So it is my belief that Eric Langan is essentially stalling because there may be something else going on.
I have no way of knowing for sure, but I believe that management may be debating taking all or part of the company private, which could explain the delay in the REIT. Perhaps the buyer wants the whole thing – or only part of it.
In the event of a buyout, I believe that the combined value of all of the parts is $18-22 per share, and I think that we will know a lot more by the end of the year. Eric Langan is sitting still for a reason. I don’t know exactly why, but I believe that shareholders will benefit.
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DISCLAIMER: The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Investments in securities of small-cap and growth companies may be especially volatile.Past performance is no guarantee of future results.
