ClubCorp (MYCC) shares were cut in half in the first 8 weeks of 2016 as investors grew concerned about the company’s exposure to Texas.  Approximately 30% of MYCC’s country clubs are in Texas with 8% in Houston.  A second part of the problem was an extremely negative research report issued by a broker that emphasized the Texas worries and also noted that the company’s growth by acquisition strategy was faltering.  We were shocked at the decline in the stock price, which continued even after the company preannounced 2015 full year results that were in line with Wall Street estimates.

MYCC reported its complete 4Q15 results last week and provided guidance for 2016 and we were pleased to learn that the overall story remains intact.  Management provided extensive detail on the results of the Texas clubs and also revealed incremental data on its acquired clubs.  These additional details have firmed up investor confidence and undercut the bear case and the stock has begun to recover, regaining about 1/3^rd of this year’s losses in just a few days.  Even the bearish analyst threw in part of his towel, upgrading MYCC shares from Sell to Neutral.

Regarding Texas, MYCC noted that in the fourth quarter, Houston clubs saw revenue and operating cash flow decline less than 1%.  Furthermore, Texas-ex Houston grew in the mid-single digits, at least as fast as markets in Georgia, Arizona, and California.  Management also provided data that revealed any slowing in Texas that took place during any part of 2015 was much more likely to have been caused by extremely heavy and unusual rainfall than energy-related memberships or club spending.

On acquisitions, management showed year by year results of acquisitions since 2010 supporting the high cash on cash returns from the initial purchase price and the “reinvention” capital committed to upgrade the clubs.  The company also explained that the expensive debt raised in December was not done out of desperation but rather to finance a deal to acquire a multi-club portfolio that later fell through.  Liquidity is now over $200 million, enough to support a normal 2016 acquisition slate.

Despite the excellent return on acquisitions, the Board chose to raise the hurdle rate for future acquisitions and simultaneously initiate its first even share buyback.  The message is clear:  the stock price is way too cheap and the company can buy itself for an even greater return than all but the very best acquisition opportunities.  As investors, we appreciate the discipline the Board is taking with this action.

Guidance for 2016 brackets the current consensus for revenues and operating cash flow.  Management reiterated 2018 guidance of $300 million in EBITDA although may have slightly qualified its language.  This is not particularly concerning considering that even after the recent recovery, the stock price still implies a significant shortfall for 2016 and the 2018 target.

Northlake feels MYCC can easily recover to over $15 as recent concerns continue to moderate.  A stable economic and operating environment for the U.S. economy and MYCC could rally the stock back to $20 later this year.  We believe the management team is very strong and support from the share buyback and very healthy 4% dividend yield will make the wait for much higher prices worthwhile.

MYCC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  MYCC is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.