David Einhorn(Trades, Portfolio) is President of Greenlight Capital (a value-oriented investment advisor). He is most famous for his short bet against Lehman Brother during 2008 crisis. Einhorn believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. He is a noted activist investor, taking positions in companies, and then pushing management to implement changes.
Last quarter, he initiated a position in Life Time Fitness, Inc. (LTM, Financial) by buying 1,835,685 of its shares. The company has a good history of growth and is available at a reasonable valuation. Gurufocus has a business predictability rating of 3.5 star on the company. Here's a look at the company in detail.
Company Overview
Life Time Fitness, Inc. operate distinctive and large, multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. As of October 30, 2014, the company operated 112 centers in 25 states and one Canadian province under the LIFE TIME FITNESS® and LIFE TIME ATHLETIC® brands.
The company has three primary sources of revenue:
- First, its largest source of revenue is membership dues (~63% of total revenue) and enrollment fees (~1% of total revenue).
- Second, the company generate revenue within a center, which it refers to as in-center revenue or in-center businesses (~32% of total revenue), including fees for personal training, registered dietitians, group fitness training and other member activities, sales of products at its cafés, sales of products and services offered at LTM spas and tennis programs.
- Third, the company has expanded the LIFE TIME FITNESS® brand into two other offerings: health, and events and media. These offerings generate ancillary business revenue (~4% of total revenue).
Financial
Over the last ten years the company's revenues have grown by 13.10% annually while its EPS has grown by 13.60% annually. Life Time Fitness has continued its high growth rate in the recent years as well and its EPS has grown from $2.26 in FY2011 to $2.99 for the trailing twelve months ended Sep. 30, 2014. The following table shows revenue, EPS and other key metrics of the company over the last couple of years.
Source: Gurufocus Value Screens
One can see that while the company's earnings have grown, its free cash flow has turned negative off-late. This is because the company is continuing to open new centers which require investment for growth.
Investment argument
Life Time Fitness, Inc is taking several steps to grow its revenues. The most notable ones include improving retention, introducing new offerings, and opening more centers. Throughout the company, management is providing training to its team members to improve client retention rates. In the third quarter last year, the company saw its first reduction in year-over-year attrition since fourth quarter of 2011. While it was a modest 10 basis points improvement, the company is expecting its magnitude to increase going forward. The company's goal is to reduce attrition to 33% by the end of 2015 from approximately 35.5% for 2014. Over the next few years, the company is trying to reduce customer attrition rate to 30%.
In addition to reducing attrition and improving retention, the company is also focusing on growing “in-center” revenues by increasing its product and services offerings, and encouraging it members to use its services through LT BUCK$ affinity program. In the third quarter of fiscal 2014, the company's in-center revenue grew by 11%, led by kids activities, personal training and its small but fast-growing tennis business.
New centers have been another important growth driver for the company and the company has increased its number of centers from 84 in 2009 to 112 at the end of third quarter 2014. Going forward, the company is expected to continue its expansion spree. Looking at its development pipeline, the company is on track to open 6 new centers in 2015, including centers in 2 new markets: Boston and Sacramento. For 2016 and 2017, the company expects of deliver similar number of clubs.
In addition to investments in good growth projects, management is also enhancing shareholder value through buybacks. The company has spent $167 million to repurchase ~$3.5 million shares since August 2013. On July 22, 2014, the board of directors approved a new share purchase program of up to $200 million for a two-year period ending July 2016 and the company is likely to continue with its share repurchases going forward.
Life Time Fitness is trading at 17.65 times FY2015 estimated EPS. According to sell-side analysts, the company's topline and EPS are expected to grow 8.20% and 10.65% respectively in FY2015. I believe the stock is a good buy at current levels given its reasonable valuations and good growth prospects.
