Life Time Fitness, Inc. (NYSE:LTM) is what might be called an integrated health lifestyle company. It operates athletic and fitness centers, including offering sports and fitness programs; produces nutrition supplements; and publishes a magazine. It seemed odd to us that a company which is involved in so many hot businesses- and grew its earnings by 21% last quarter compared to the previous year- trades at only 20 times trailing earnings. Perhaps there are significant problems with current operations, but it is also possible that the company’s relatively low market cap ($2 billion) has allowed it to escape the market’s notice.
The company saw 12% revenue growth in the second quarter compared to Q2 2011. Most of its sales come from membership fees, with about another third coming from in-center revenue. Cost growth was fairly moderate, which helped grow earnings at the 21% rate. Net income in the first half of 2012 ended up being 22% higher than the same period in 2011; most of Life Time Fitness’s $142 million in cash flow from operations was invested in property and equipment. Same-center revenue growth was 4%, and average revenue per membership was up slightly.
As we’ve mentioned, Life Time Fitness, Inc. has a trailing P/E multiple of 20. Wall Street analysts predict that the company will earn $3.17 in earnings per share in 2013, which would represent a 14% increase over what they expect for this year- certainly manageable given what it has done recently. Life Time Fitness therefore has a forward multiple of 15, and looking out further it has a five-year PEG ratio of 1.1.
Life Time Fitness, Inc., possibly partly because of its low market cap, did not receive much attention from the funds in our 13F database in the second quarter. The largest position belonged to Daruma Asset Management, which is managed by Mariko Gordon. Gordon and her team increased their stake in Life Time Fitness by 6% between April and June, and closed the quarter with 1.3 million shares. This made it one of the five largest positions in the fund’s portfolio (see more stock picks from Daruma Asset Management). James Dondero’s Highland Capital Management reported owning about 410,000 shares at the end of June (learn about more stocks that Highland likes).
Life Time Fitness doesn’t have any large-cap public competitors, but we can compare it to other fitness-oriented companies. One peer according to this line of thinking is Lululemon Athletica inc. (NASDAQ:LULU). Lululemon’s high-priced athletic apparel capitalizes on the same fitness trends that Life Time Fitness benefits from, though it has seen much higher growth: a 49% growth rate in its earnings last quarter over a year ago, driven by high revenue growth. However, Lululemon trades at much higher earnings multiples. The trailing P/E of 51 and forward P/E of 34 suggest that investors are very excited about its prospects for prospering from fitness trends. Other “healthy living” peers include nutritional supplement companies Herbalife Ltd. (NYSE:HLF) and USANA Health Sciences, Inc. (NYSE:USNA) and weight loss program provider NutriSystem Inc. (NASDAQ:NTRI). The supplement makers are actually fairly cheap as well, at 13 times trailing earnings, and posted earnings growth rates of about 20% last quarter. They also both trade at about 11 times forward estimates. They could make for interesting picks if an investor does not place much value on Life Time Fitness’s positioning in fitness centers. NutriSystem had a 62% decline in earnings in its most recent quarter compared to the same period in 2011; while the sell-side is optimistic and gives out earnings estimates which imply a forward P/E of 15, we would avoid that stock for now. We think that Life Time Fitness has good growth potential and it deserves attention- and consideration- from investors.