Own a strip club

I found this interesting link from MarketWatch on The Kirk Report. It seemed funny, but then I re-read it. Apparently, people still can't lay off the sauce, even when times are tough. They just move down the scale, rail instead of premium, Natural Light instead of Heineken, or getting blasted at home rather than at the local watering hole. I believe that this is what an economist would call satisficing.

I am trying to figure out how much this will affect my holdings in RICK as strip clubs make a killing on drinks. If people are going to be drinking less, than the company should take a hit.

There's some litigation risks that threaten to change how they do business in Houston where they derive 14% of their business. Local lawmakers want to them to charge a $5 cover and make the girls wear latex and bikini bottoms.

They are also a company that is aimed heavily at corporate clients. These guys are going to be throwing around less discretionary funds just like everybody else. As they acknowledge in recent SEC filings, "further reductions in the amounts of entertainment expenses allowed as deductions from income under the Internal Revenue Code of 1954, as amended, could adversely affect sales to customers dependent upon corporate expense accounts."

Still, things can't be all that bad since they issued a press release two weeks ago adjusting their 2008 guidance upwards by 7 cents per share due to improving margins, not deal making. This is pretty exciting since Rick's has been on an acquisition binge, executing their consolidation strategy.

Now this is not a typical value stock. It doesn't trade at low or depressed multiples. I like this stock because management is executing a private-public market arbitrage. On their most recent conference call, CEO Eric Langan said that they have never paid more than 6x EBITDA for a club. They actually bought their very successful Miami location for 2.5x EBITDA. The stock market than rewards the new entity with a 28x EBITDA multiple. What a business! These acquisitions will only get cheaper if the economy hits the skids. Also, the maze of local, state, and federal ordinances that they have to navigate makes for one hell of a moat. You can't just open up a strip club anywhere. Plus, cash flows are growing by leaps and bounds.

Notice that there were only six analysts on this earnings call. I've owned and been following the stock for about a year, and only now is any sort of institutional money starting to wake up to the possibilities.