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Rex Rells - Rick's Cabaret International, Inc. (Nasdaq: RICK)

January 17, 2010 | About:
Wax

Wax

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What a crazy weekend! I received a last minute invitation to an equities seminar, and having nothing else to do, and even less brain power, I accepted. What I didn't realize until I got there was the seminar was to teach Japanese investors about investing in American equities.

Arriving, I noticed that the banquet room was spacious, but not overly so, making my wonder just how many people were going to turn out on a Saturday night to learn about investing in American equities? Still, I was willing to be open minded, and since I was already there...

I found a spot to sit that would allow me a bit of a fast escape should my eyes close and my dreams return me home, and waited, I mean this is not my first rodeo when it comes to investing seminars.

Right on time, out came the Master of Cerimonies for the evening, a Mr. Satoru Ishikawa. He didn't speak at first, instead he raised his arms above his head and began to clap his hands. Next thing I know, the room became lighter, and then the floor began to shake. This went on for some minutes before I realized what was going on.

Since parking myself next to an exit, I had paid little attention to the crowd. Now as I watched Mr. Ishikawa jump up and down as he clapped his hands, I realized that's what the entire crowd was doing. I also noticed, I was the lone gaijin in the room.

At last the the din was silenced and Mr. Ishikawas said simply, "Rex Rells". Damned if the clapping and jumping didn't start again. Naturally I'm thinking this Rex Rells guy must be a pretty big deal in the Japanese investment community, like maybe he is the end all be all to Japanese investors.

Being the only gaijin in the room, it took me a few minutes, but at last I understood that what Mr. Ishikawa was saying was not Rex Rells, but Sex Sells.

Sure enough, before I could blink, up on the miniature diamond vision screen pops the website for Rick's Cabaret International, Inc. (Nasdaq: RICK).

Having now taken a peek at what Rick's has to offer the average investor, we think it best that our money is not the only thing we keep in our pants.

Basis

Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending September 30, 2009, as filed with the Securities and Exchange Commission on December 17, 2009.

What They Do

Rick's Cabaret International, Inc. operates upscale gentlemen's clubs, nightclubs, bars and restaurants in the U.S. and has a licensing program in Latin America.

Founded in 1983, the company pioneered the creation of elegant gentlemen's clubs featuring topless dancers and high quality restaurant service.

The company went public in 1995 and since that time has built powerful brand name awareness for its upscale environment and enjoyable adult entertainment. Many performers from Rick's have become Penthouse Pets and Playboy Playmates.

Anna Nicole Smith, met her oil billionaire husband while dancing at Rick's Cabaret in Houston.

The principal business lines of Rick’ Cabaret are nightclub entertainment and the principal brands are Rick's Cabaret (high-end clubs in New York City, Philadelphia, Minneapolis, Houston, San Antonio, Ft. Worth, Austin); Club Onyx (upscale nightclubs in Houston and Charlotte catering to African-American gentlemen); XTC Cabaret (non-alcohol clubs in several Texas cities); and Tootsie's Cabaret (popular Miami adult nightclub).

Licensed clubs are now open in Buenos Aries and the company also owns an upscale club in Dallas. The company has also signed letters of intent to buy other clubs, as well as to license a Rick's Cabaret in New Orleans.

The company also has internet activities and under the flagship www.NaughtyBids.com and the company owns and operates adult auction sites. Rick's also owns www.CouplesTouch.com an adult entertainment subscription website serving people in the "swingers" lifestyle.

The company's media division purchased ED Publications, Inc. in April 2008, the leading trade magazine serving the multi-billion dollar adult nightclubs industry. In addition, the company owns three industry trade publications, two industry trade shows, and more than 25 industry-related websites.

Short-Term Investment

The stock entered an upward trend in the middle of December and now appears to be overbought. Coupling the ovebought condition of the stock with first resistance at $12.33 and first support at $8.04, and given a recent close of $11.54, it simply doesn't seem to make much short-term investing sense to have the stock in our portfolio at this time.

Long-Term (5 Year Hold) Investment

To us, the company's basic metrics, the current ratio, the quick ratio, and the cash ratio, are close to what we would consider investment qualtiy, and we liked free cash flow at better than $2.10 per share, but we think that the company's debt at more than 50% of gross revenue is much to high.

We note that the company's acquisition costs for fiscal 2009 were only 7% of its acquistion cost for fiscal 2008, yet debt was reduced year over year by less than 15%.

So despite a year over year increase in sales of more than 25% we simply don't find that prior acquisitions have been immediately accretive to earnings. And as the US economy continues to struggle, we don't believe that net income will increase for the company during fiscal 2010.

Our 5 year hold Reasonable Value estimate for the company based on year end fiscal 2009 data is $26-$28, and we note that approximately 60% of the financial metrics we focus on, are what we would consider investment quality.

In addition, we anticipate at least a 25% reduction in our Reasonable Value estimate as fiscal 2010 unfolds, since we believe that management will continue its laissez-faire attitude toward debt reduction.

Wax

For the Ricks' Cabaret Raw Value worksheet, please click here.

About the author:

Wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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