Life Time Group Stocks: I don’t have the time of my life (NYSE: LTH)

Top view of a paraplegic woman training in a competitive swimming pool.

Trevor Williams / DigitalVision via Getty Images

When the Lifetime group (NYSE: LTH) made public in October last year, I concluded it was time to relax, not invest in the distinctive game of wellness, health and fitness. Since the public offer the company has seen a very modest recovery in operations despite the reopening of the economy amid the pandemic in the background.

This observation makes me cautious, despite some pressure on the share price, as I am not convinced of the operating trend of recent times.

A summary

For those unfamiliar with the Life Time Group, the company was founded three decades ago with the goal of creating happy and healthy communities. Its huge resorts offer yoga, swimming, fitness, spa, classes, food, relaxation etc., focusing on families who would like to enjoy time together.

The company operates more than 150 centers in 29 US states as its 30,000 team members are active in these facilities and a Canadian location, providing a wide range of these services to over 1.4 million members which generate an average of about $ 2,000 in average revenue. With a business of just $ 100 million in 2000, the company has experienced continuous growth except for the economic crisis and the pandemic.

The company aimed to list between $ 18 and $ 21 per share, with prices set at the lower end of the range. With 198 million shares outstanding, the company achieved an equity valuation of $ 3.5 billion, or $ 5.0 billion if we take pro forma net debt into account.

This valuation was applied to a company that generated $ 1.9 billion in 2019, which reported operating earnings of $ 168 million, with operating margins that went from low to double-digit percentages to high percentages at a figure. Sales for 2020 were reduced to just $ 948 million on which a huge operating loss of $ 359 million was reported.

Revenue increased 17% to $ 572 million in the first half of 2021 with operating losses shrinking to $ 139 million, although trends were already improving in the second quarter. Between the fact that the company was still recovering and the pandemic was far from over, investors were hesitant as the stock dropped to $ 17 on the first day of trading.

Believing that sales could reach $ 2 billion annually in a normal year, with operating margins pegged at around 10%, I set a potential net profit at $ 112 million after taking into account interest expense and taxes, equal to just over half a dollar per share. This has made it difficult to see attractiveness at around 30x normalized earnings, even if the company appears to be a long-term secular growth game.

What happened?

As the shares of the IPO initially rose to $ 22 per share in a delayed response to the IPO. Since that time, the shares have fallen, actually hitting a low of $ 10 and changing in March before recovering to levels around $ 15.

In October, the company released its third quarter results with revenues up 67% to $ 385 million as the company transformed a modest EBITDA loss into a profit of $ 47 million based on that metric. Note that the D&A component of the business is quite high given the activity-intensive nature of the business, with operating losses reported at $ 17 million. Additionally, no further rapid recovery was observed with fourth quarter revenues seen at $ 350- $ 360 million, marking a small sequential decline and EBITDA set to increase slightly on a sequential basis to $ 50 million.

In March, it was evident that fourth quarter results were on the high end of the forecast with fourth quarter sales standing at $ 360 million, although EBITDA of $ 48 million had faded slightly, indicating a continuation of the economic losses. Net debt still stands at $ 1.77 billion between losses and continued investment in the business, including a new facility in Chicago.

With 186 million shares trading at $ 15, the equity valuation dropped to $ 2.8 billion, giving the entire company a company valuation of $ 4.6 billion. This assessment is still difficult to rhyme with real economic performance, despite a reopening of the economy. Worrying is that first quarter revenue is seen at a midpoint of $ 390 million, and while that reveals a further increase in sales, Adjusted EBITDA is actually set to drop to a midpoint of $ 40 million midway through driving. .

And now?

To be sure, recent performance – the fourth quarter of 2021 and the first quarter outlook for 2022 – are rather disappointing. Plus, the services are quite expensive and come with a real premium, which is a bit tricky in this inflationary environment, with probably less spending on discretionary and luxury items like a company card.

Also, I’m not convinced of a 2022 revenue guide that is seen at $ 1.8- $ 1.9 billion. With the company leading for EBITDA margins of 18-20% by the end of the year, an execution rate close to $ 400 million in EBITDA could be within reach. While it looks good, note that D&A already runs at $ 230 million per year, for an operating profit of $ 170 million. With net debt at 3% on $ 1.8 billion of net debt and taxes owed, realistic net earnings could trend close to one hundred million, but it looks pretty optimistic and there are real risks to the outlook given this macroeconomic environment.

Given these overwhelming developments on the operational front, I cannot be optimistic here despite an underperforming share price from the start, which is fully explainable by a high valuation from the start and disappointing operational performance over the past few quarters.

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