RCI Hospitality (RICK) finally posted its excellent results for FY17 late last week. For the full year, adjusted earnings grew a solid 8% y/y to $1.43 as revenue increased a solid 7.4% y/y to $144.9 million. Based on the excellent performance in 2017, an increased FCF target for FY18, and an incredible evolution in behavior by CEO Eric Langan, I believe shares look attractively priced, especially compared to the masses of stocks trading at 30x+ earnings. Let’s dig into the highlights from the fourth quarter and fiscal year, and the primary drivers for why RCI is attractive.
Focus on Free Cash Flow Evident
One of the beautiful aspects of the RCI business model is that it throws off tons of cash, and because of the semi-regulated nature of its core adult nightclub business, it must go through M&A. This means that during any given year, it may make sense to let cash accrue on the balance sheet if there are not any deals, or it may mean that RCI should strike and do a major deal.
Nonetheless, free cash flow in FY17 totaled a whopping $19.3 million, which easily exceeded the firm’s target of $18 million as the company spent its capital on acquiring and opening new clubs. Maintenance capex was only $1.8 million, though I think this number will increase going forward.
