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Investors Should Get A Rise Out Of Rick's Cabaret Future Earnings

samsung1

Ohio

Near Term Catalysts

Management to give FY2014 guidance before end of fiscal year
My non-GAAP EPS estimates of $1.46 (FY13) -> $1.94 (FY14 est.) -> $2.39(FY15 est.) show new acceleration trend.
Vivid Los Angeles to open soon, providing an operational beach head in the West Coast.
Vivid NYC to open in time for upcoming Super Bowl XLVII in NY.
"Breastaurants" are the second hottest category in the restaurant sector.
New Ricky Bobby and Bombshells concepts makes Rick's a serious competitor in this category.
Q3:FY2014 earnings beat of $0.36 shows higher margin clientele are returning to Rick's clubs.
Management could announce a plan to unlock their balance sheet by moving real estate assets into a REIT structure which could unlever the balance sheet and inject capital into the operational side of Rick's Cabaret.
Technically, RICK stock looks ready to challenge its multi-year high of $15 if it can get past near-term resistance levels.

I have been following the growth story of Rick's Cabaret since they embarked on their roll up campaign in 2005 with the acquisition of what is now considered their flagship operation, Rick's NYC. They have grown their business from 7 stores to 37 stores during this period. Correspondingly, operational revenues have grown from $15 million to over $108 million (TTM) in the same time period. Unfortunately EPS growth up to now had not followed the same upward trajectory.

This peculiar trend is changing course and investors should pay attention. EPS growth is resuming as evidenced by the Company's first three quarters of FY2013 financial results. So far this year, we have seen a revenue gain of 18% and a corresponding non-GAAP EPS gain of over 14%. My projections for non-GAAP EPS (September 30 year end) are $1.46 to finish the current fiscal year.

Yet the price of Rick's Cabaret stock at $9.31 trades at a miserly 7.28 times trailing twelve month earnings. It's forward price to earnings multiple for a year which has less than two months of operations is 6.73 times non-GAAP earnings.

Past Disappointments to Expectations Are In the Past

I am well aware of the factors that have acted as speed bumps to past EPS growth at Rick's. Acquisitions prior to the 2008 financial sector collapse in the U.S. were transacted at bubble prices. The resulting recession caused a relative under performance in the new assets relative to expectations. Write downs as the Company shed underperforming assets and other problems during the following few years also had negative effects on EPS growth. Fortunately, at the end of FY2012, all of the obstacles to sustained EPS growth are now water under the bridge.

Recent acquisitions especially the larger ones have been exceeding expectations. This was to be expected in a post bubble economy as acquisitions over the past three years have been purchased at the right prices.

Future Estimates are Even More Compelling

I reiterate that the speed bumps are in the past. In my opinion, there is clear sailing ahead.

With six additional stores due to be added over the next few months plus the contributions of the previously added five clubs to the picture, I are projecting top line growth in FY2014 to $148 million (>31%). I estimate that FY2014 non GAAP EPS of $1.94, a greater than 33% growth rate. The projected acceleration is due to the fact that the areas of extraordinary expense are arguably under control now and current margins are outpacing any of the expense areas that have previously caused EPS expectations shortfalls. Future EPS growth should reflect margin expansion.

For the value investor, Rick's common stock is currently priced slightly below book value. Its financial metrics relative to other restaurant stocks are compelling. A review of restaurant comps tells me that the market prices RICK stock at an extreme discount to its peers.

For the growth investor, the recently reported Q3:FY2013 should be considered a inflection point for non-GAAP EPS growth. FY2013 growth will come in at >17%. FY2014 growth should accelerate to 33%, yet it trades at only 6.73 times its ttm earnings.

http://seekingalpha.com/article/1648372-…