Bottom Line

Buy Now, Reap Rewards Later

I’ll keep this really simple and list my reasons for purchasing shares in Rick’s right now in order of importance to me for my investment thesis:

Reasons I like Rick’s Now:

• Cash flow back in the house: Rick’s cash flow turned decidedly positive this quarter in a big way and a return to those free cash flowin’ days are upon us.

Nothing makes me smile like cash in the bank, and Rick’s paid down about $4 million in debt over the last few quarters while also buying back shares of their stock, renegotiating other debt covenants to increase that cash flow further, and leaned out operations in terms of cost controls, etc.

The bottom line with any business is its ability to generate cash, and Rick’s is showing once again, what a true powerhouse they are at doing just that.

• Decidedly more upbeat tone on call, and outlook for economy: Investing is all about looking into the future and making a best guess based on current and past information.

The tenor of Rick’s conference call, 10-Q filing, as well as outlook coupled with their April results and overall economic stabilization, leave me feeling much more secure in the company, the economy, and the prospects of both going forward.

It might not turn around right away, but I also think that things aren’t going to get worse, and in the mean time, Rick’s is generating tons of cash flow even if things stay the way they are right now, with huge upside when there is any uptick at all.

• Valuation Looking Juicy: Valuation junkies prepare to bust out your calculators, because Rick’s offers a bevy of ratios for whatever your heart’s desire is.

Here are just a few:

Discounted Cash Flow Valuation: While everyone’s models vary, pricing in a high Beta of 3, along with 0% growth in operating income this year, followed by 15% next year along with other conservative inputs, I get a fair value for Rick’s of about $8.15 - $9.40 per share. This number can jump quickly with any upside, or change in results.

P/E Ratio: Rick’s trailing P/E sits at about 12.09 including the May 12th results, compared to the restaurant industry overall P/E of about 14.10. Forward P/E for this fiscal year sits at 11.45, and 2010 sits at 6.67, all ridiculously low valuations.

PEG: PEG ratio for Rick’s using just a 15% 3-5 year growth rate comes in at .76 for this year, and .44 for 2010, vs. 1.10 for the industry.

Price to sales (P/S): Rick’s sits at a .90 vs. 1.9 for the industry.

Price to Book (P/B): Rick’s sits at .7 vs 4 for the industry

Price to cash flow (P/CF): Rick’s is at 6.7 vs. 10.6 for the industry.

Here’s the big one: Price to Free Cash Flow (P/FCF): Rick’s trades at an incredible 6.6 vs. 43.7 for the industry!

• Debt lowered, What’s Left Renegotiated: I love the fact that Rick’s is paying off debt that is current, will be able to meet all obligations throughout the next year, and has renegotiated all of their debt for lower payments now and potentially lower ones in the future as well if their stock price rises.

This doesn’t even include the cash that is now available for acquisitions or to buy back more stock.

• Closing Underpeforming Clubs: Rick’s sold one club outright this quarter, and was in the process of selling another one which should close next quarter. I say good riddance as it tightens up operations once we work through the initial write-downs in value.

• Same-Store Sales Improving: This is a guarded number that can be somewhat manipulated, that’s why it’s lower on my list, but suffice it to say, same-club sales declines are slowing and look to be turning flat to positive in the very near future.
• Comps Will Look Better Going Forward: Year over year results for profit, cash flow, and revenues as well as same-store sales are going to look very favorable as we enter about the 1 year mark when Rick’s operations really started to deteriorate. This will make comparisons easier, and make the company look much better for the investing community’s stock charting programs.
• Stock Price Momentum, High Volume: Last but not least is the fact that Rick’s stock has been on a tear lately rising over 200% from it’s lows a few months ago on high volume. Now that the stock is above $5.00 per share, institutional investors can rotate in more favorably, and this is being backed up by several technical indicators. In addition, the stock is trading above its 50 day moving average around that $5.00 mark

Bottom Line: I have been holding Rick’s since the days before it crashed to $2.50, and have held on for the round-trip journey back to were shares sit now.

All the while I waited patiently for several things: the stock market to recover, the economy to recover, and finally, for Rick’s to recover.

We are at the crossroads of all 3 taking place in one way or another, albeit in disguised and thinly veiled form, where we need to take out our crystal balls, as well as our spreadsheets and chart analysis, to get ahead of the curve.

I added to my position in Rick’s with confidence that this turnaround is in place, and was pleased with the latest quarterly earnings, conference call, and company filing which showed transparency and a recovery in place.

I will note quickly, that if the stock takes an unexpected tumble, I would advise you to sell your entire stake in Rick’s if shares fall below about $4.75 per share on heavy volume with no news out of the company for the fall.

I wanted to throw that in to protect you and I on the downside, but as of right now, I feel that we are fairly protected from any further breakdown in Rick’s stock, and in fact, I feel very strongly that the best days are ahead of us and not only does Rick’s qualify for my Double Thesis, but we could in fact see such a move in short order as Wall Street begins to place a correct valuation on this stock.

In the mean time, stay tuned by following me on Twitter for real time updates on Rick’s as soon as I become aware of them.

New to the Rick’s story?

• Read: my update on Rick’s last earnings release and conference call
• OR: read my recent buy recommendation

–> Get updates and real-time stock trades you WON’T find on PeakStocks.com by following me on Twitter.

*As of 5-13-09. Except share price, all values in millions.

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