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Life
Time Fitness (LTM)
Business: Operates
a chain of 40 health and fitness centers in 8 states.
Competitive Advantage: LTM’s clubs are larger
and offer a wider variety of facilities than the competition.
Growth Drivers: Expansion into new markets and
organic revenue growth through in-center sales opportunities.
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Current
Price: $27.00
Rating: Buy
Market Capitalization: $912 million |
2004
EPS: $0.88 (est.)
2005 EPS: $1.05 (est.)
Five-Year Projected Growth: +24%
P/E on 2005 EPS Est.: 26
52-Week Range: $20.39 to $27.22 |
Life Time’s centers include
traditional fitness club facilities such as exercise equipment and
weight rooms. Most of the company’s clubs also include spas, healthy
cafes, personal training facilities and large pools complete with water
slides.
Life Time began operations in
1992 but is relatively new to the stock market -- the company went
public via an initial public offering (IPO) in July of 2004.
Competitive Advantages
LTM has a number of major competitors in the fitness and health club
market. Some of these competitors are far more established than LTM;
Bally’s Total Fitness, for example, already boasts 418 centers located
in 29 states.
However, LTM offers a number of
advantages over many of its rivals. More specifically, the company’s
fitness centers offer a broader range of services at a lower price than
the competition. Consider that most health clubs are a fraction of the
size of the average LTM center -- for comparison, the average Bally’s
club is closer to 30,000 square feet, about one-third of the size.
This size reflects the broader
range of services offered at LTM's centers, especially at the
company’s newest, most modern facilities. This includes equipment like
rock-climbing walls and basketball courts -- items rarely found at your
average fitness center. Also important is that by increasing the size of
their facilities, customers have reported fewer problems with long
waiting lines to use exercise equipment. Best of all, despite the extra
services, the firm has still managed to keep its prices in line with
industry norms.
This advantage is reflected in
the company’s ultra-high customer retention rates. According to
LTM’s initial offering prospectus, the firm's retention rates were a
full 6.3 percentage points higher than the industry average in 2001 and
5.7 percentage points higher in 2002.
Growth Drivers
My staff and I see two main growth drivers for LTM. First, the company
remains relatively small and underexposed geographically. With just 40
fitness centers in 8 states, LTM has yet to fully expand its footprint
across the country. In fact, there are plenty of markets that are
totally untouched by LTM. For example, to date LTM hasn’t opened a
location in two of its largest potential markets, California and New
York.
My staff and I believe the
company has scope to grow by simply replicating its business model in
new markets. This year the company opened five new locations, and next
year LTM plans to open six. Even better, the company raised around $80
million in its IPO this summer -- enough to help it fund further
expansion in the coming years.
Secondly, my staff and I
believe it's a mistake to ignore the company’s potential for further
organic growth from its existing locations. Consider that in its most
recent quarterly report, LTM reported growth in membership dues of about
+22% year over year -- an impressive figure. But even more interesting
was the near +30% growth in so-called "in-center" revenues.
The firm derives these revenues from services like its café and spa
facilities, and these in-center revenues are making up an increasingly
larger chunk of total company revenues. Last year in-center revenues
stood at 22% of the total. This year the company is looking at a number
closer to 25% of revenues -- a significant jump for a single 12-month
period. Thanks to rapid growth from these lucrative activities, LTM's
overall growth rate should remain strong in the years ahead.
Valuation
LTM
has been no wallflower since its July IPO, climbing nearly +30% from its
first day's close of trading. Nevertheless, the stock still looks like a
bargain considering its tremendous growth potential.
Analysts peg long-term growth
at close to +24% and the stock is currently trading at a little less
than 26 times 2005 earnings. That gives LTM a P/E-to-growth (PEG) ratio
of just over 1 -- pretty reasonable for such a high-growth stock.
Earnings should top $3 per share within the next five years. Assuming
the company earns a market multiple of about 20 times earnings, the
stock should eventually be worth north of $60 -- more than double the
current price.
We also like the company’s
low institutional ownership. Institutions hold only about 30% of the
firm's outstanding shares. That ratio should rise as the company gains
scale and develops a longer operating history (both of these items
should help support the share price).
Important Note: To
view the remainder of this article, in which Paul Tracy and his staff
provide an in-depth analysis of two additional small-cap growth plays
with tremendous long-term potential, you'll need to subscribe to our premium Market Advisor
newsletter. Please visit one of the following links to continue...
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