I wanted to update you on 2 of the companies in the PeakStocks.com portfolio that have had developments in the last few days that you should be aware of.

This includes:

• Rick’s Cabaret International, Inc. (NASDAQ: RICK), which had some bad news in the form of a lawsuit, and then some really good news in the form of higher than expected sales and same-club sales numbers which caused the stock to pop.
• eHealth, Inc. (NASDAQ: EHTH), which recently announced a share repurchase program to buy up to 10% of the company’s shares.

Let’s get right to it.

New to the Rick’s Story?

Rick’s Cabaret International, Inc., owns and operates 19 upscale adult nightclubs serving primarily businessmen and professionals.

Rick’s nightclubs offer live adult entertainment, restaurant, and bar operations in Houston, Austin, San Antonio, Minneapolis, Minnesota, New York, Dallas Fort Worth, Charlotte, and other cities under the names Rick’s Cabaret, XTC, and Club Onyx.

Rick’s differentiates themselves by providing an atmosphere where they can offer a unique quality entertainment environment that includes highly experienced and well screened entertainers, high quality managers hired from within the adult entertainment industry, complying with all local, state and federal laws at all times, and finally, providing an atmosphere and ambiance Incorporatedluding exclusive VIP rooms, that appeal to upscale clientele.

Want more?

• Read my last company update here.

Rick’s: Good News, Bad News

Let’s  start with the bad…

Early last week Rick’s Cabaret was sued by a woman in Houston, Texas who claims that Rick’s was at least partially responsible for her son’s death late last year (Dec. 2007), when a dancer from Rick’s killed him while driving under the influence.

The lawsuit claims that Rick’s encourages its dancers to drink with patrons, and thus was responsible for sending the dancer home while intoxicated and without taking proper precautions to ensure that the dancer was not driving home drunk.

You can watch a news feed of the story here.

According to the lawsuit, the dancer’s blood alcohol was .215, more than twice the legal limit for blood alcohol concentration.

While a civil lawsuit has already been filed against the dancer in question on charges of wrongful death, the charges against Rick’s have only recently been added.

The lawsuit states:

“The more drinks the customers bought for the dancers, the more Rick’s would profit. The dancers’ Incorporatedluding Liem’s (the dancer in question), decision to consume alcohol while on the job was not voluntary. Rather, it was mandatory in order to continue successful employment at Rick’s.”

Rick’s lawyer, Robert Axelrod, and spokesman Allan Priaulx both said the company does not comment on ongoing litigation.

So what does this mean?

It’s really tough to say.

I’m no legal expert, and Rick’s won’t comment for obvious reasons, so I’m not sure what the company’s take on the whole situation is.

The monetary ramifications aren’t clear either because there were no specific amount of damages noted in the filing.

Is this a case of an angry family coming after anyone they can to try and squeeze a public company in their hour of need, or do they have a legitimate complaint and lawsuit that shows Rick’s to be negligent in protecting not only its dancers, but, once those inebriated dancers are unleashed, to the public at large?

At this stage, I won’t venture to guess either way, but am passing along the information since it is material to those who own Rick’s as I do.

In the end, I don’t see this costing Rick’s much in terms of pure dollars, but it could have long lasting ramifications in terms of the company’s overall perception in the public eye.

Now some good news…

On the bright side Friday, and believe me there wasn’t much bright side in the market on Friday, Rick’s surprised many Incorporatedluding myself, when they announced that not only have sales increased 113% year over year in October (mostly due to acquisitions), but more importantly, same-club sales which measure sales at clubs that have been operated for one year or more, rose a stunning 8%.

The top line figure was obviously goosed via the acquisitions that Rick’s has been folding into its operations, but the same-club comps are irrespective of the acquisitions since they don’t include recent purchases less than 12 months old.

The CEO Eric Langan stated: “These results are so outstanding that we have made an exception to our policy of announcing sales only on a quarterly basis, so that we could bring the news out sooner.”

I’ll add to that that they were also probably spurred on because of Rick’s precipitous stock price declines in the face of a tumultuous market, and the aforementioned lawsuit, but who’s counting.

Rick’s further went on to say that sales were up nearly 30 percent at the company’s flagship New York City club, which had a record month and that each of the company’s brands — Rick’s Cabaret, XTC Cabaret and Club Onyx — reported sales increases over the previous year.

Bottom Line

I thought that Rick’s would handle the economic downturn better than their stock price was reflecting, and even with analyst’s lowering their estimates to $1.25 per share on average for next year, that still represents 25% growth assuming no additional acquisitions!

With Rick’s trading at around $5.00 per share, that means the company’s forward P/E ratio for next year is a stunningly low 4!

Yep, you read that right…a P/E of 4 for a company that is growing sales, earnings, is free cash flow positive in a huge way, and is expected to grow both top and bottom line numbers even if they don’t acquire another club in all of 2009.

Oh, and Rick’s recently increased their stock buyback program to $5 million, which represents about 10% of the shares outstanding at current prices.

What gives here?

Well, there are several reasons, I’ll list a few:

• Rick’s is a small cap stock that has been getting hammered as hedge funds liquidate positions in smaller, riskier stocks
• Rick’s is a sin stock, and suffers from poor perception and lack of analyst coverage, although there currently are 2 analysts that cover Rick’s
• Rick’s is carrying some debt on their balance sheet, so that could be spooking the market in these troubled debt financing times, even though Rick’s will be able to pay off all their debt through the cash flow generated from their operations
• The recent controversy surrounding the company and stock regarding the aforementioned lawsuit as well as reports out of Las Vegas that Rick’s is participating in paying a bounty to cab drivers; a practice that is illegal, but standard procedure in Sin City

So where does that leave our investment?

For now, I am comfortable with the 1/4 position that we hold.

Until we can get more stabilization in the market whereby small/micro-cap stocks are not being sold indiscriminately, as well as a higher visibility into Rick’s expected 2009 operations, I want sit back and keep my smallish position size.

If you don’t own shares of Rick’s then now is a good time to take on a very small position for the riskiest portion of your portfolio, and for long term investment only.

If you own shares, hold them and look to add on further weakness in the stock, and further clarity when Rick’s reports full fiscal year 2008 earnings, and guides for 2009 in the coming weeks.

Now let’s turn our attention to the good news at eHealth…

View original at: PeakStocks.com

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