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Greystone Capital: “RCI Hospitality (RICK) is One of the Cheapest Stocks in the Entire Restaurant Universe”

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Greystone Capital Management, an investment management firm, published its fourth-quarter 2021 investor letter – a copy of which can be downloaded here. During the fourth quarter of 2021, returns for separate accounts managed by Greystone Capital ranged from +3.6% to -14.5%. The median account return was -10.8%, net of fees. The median account return for the full year 2021 was +39.4%, net of fees. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

Greystone Capital Management, in its Q4 2021 investor letter, mentioned RCI Hospitality Holdings, Inc. (NASDAQ: RICK) and discussed its stance on the firm. RCI Hospitality Holdings, Inc. is a Houston, Texas-based nightclub company with a $762.9 million market capitalization. RICK delivered a 3.12% return since the beginning of the year, while its 12-month returns are up by 44.42%. The stock closed at $80.31 per share on February 09, 2022.

Here is what Greystone Capital Management has to say about RCI Hospitality Holdings, Inc. in its Q4 2021 investor letter:

"There are certain investments that I’ve lost sleep over and others that require less tossing and turning. RCI Hospitality is in the latter camp. The company’s Q4 2021 and FY21 earnings release reflected record results and the business continues to execute tremendously well, posting record revenues, EBITDA and free cash flow for the year. Bombshells early progress has been exceptional and is on track to $100mm in revenues over the next few years followed by operating margins in the 18-22% range. During the year end call, management outlined the current free cash flow profile whereby the company is doing $1 million per WEEK after debt service, all of which is before their recent 11-club acquisition (which should meaningfully add to EBITDA and free cash flow) and future club M&A. Management took an incredibly bullish stance during the Q4 conference call about their ability to continue to grow organically, reinvest cash flows and execute further M&A, while pointing to a FY22 run rate of $100mm in EBITDA. RICK’s current market cap is below $600mm.

There remains a significant reinvestment runway for RICK to deploy free cash flow at anywhere between 25-35% returns with the goal of using cheap equity to do so. One risk is that the company fails to garner an attractive multiple of EBITDA or free cash flow given the nature of the industry and strongly held (yet lacking nuance) views on the management team. In that case, I’m confident RICK will do two things, one, continue to increase per share business value and cash flow per share, and two, aggressively repurchase shares at high free cash flow yields. In other words, I believe time will be our friend. Not only is RICK the best-executing and cheapest stock in our portfolio but is now one of the cheapest stocks in the entire restaurant universe. I continue to see a path to greater than 100% upside over the next few years."

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Our calculations show that RCI Hospitality Holdings, Inc. (NASDAQ: RICK) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. RICK was in 15 hedge fund portfolios at the end of the third quarter of 2021, compared to 13 funds in the previous quarter. RCI Hospitality Holdings, Inc. (NASDAQ: RICK) delivered a 7.17% return in the past 3 months.

In November 2021, we also shared another hedge fund’s views on RICK in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.

Disclosure: None. This article is originally published at Insider Monkey.