Laxputs Posted July 24, 2014 Share Posted July 24, 2014 Life Time Fitness. Sells off 14% today after missing predictions of growing revenues from mature clubs. Reports flat revenues from mature clubs. Here's where I think LTM is at: -Near guarantee of growing revenues; business model is proven, 5-6 clubs a year will be built. -Management is honest, capable, passionate, and has a history of success in their field of expertise. -Management has proven their commitment to share buybacks in last quarter. And has just approved share repurchase program for 12% of company. -Company can reinvest earnings at around 10% ROIC and 17% ROE (using owner's earnings not GAAP earnings) -Company owns its properties. Unlike comparable company CLUB that has to renegotiate leases at the end of term and potentially uproot certain clubs. This increases costs for CLUB as they have to spend more on leasehold improvements for relocated clubs augmenting actual maintenance capex. -Conservatively financed. Over 3:1 fixed cost coverage. 1:5 specified in debt covenants. -I visited one of their newer facilities in Las Vegas. It was very impressive and very busy. -In 2Q14, management states maintenance capex of 70-90mm going forward (including any new costs at the G&A level as well) For LTM, I take CFO of 267mm projected on 2014. Subtract 90mm in mcapex (high-end). 177mm. Divide by 39.3mm shares. 4.50$/share for 2014 with growth and lower shares ahead. Looks like a pretty reliable 11% owner's earnings yield provided by an industry leader in a sector that is going to grow. Link to comment Share on other sites More sharing options...
peter1234 Posted July 25, 2014 Share Posted July 25, 2014 Thanks, sounds interesting. Is Enterprise Value close to Market Value? Do they have debt and operating leases? ;) Link to comment Share on other sites More sharing options...
Myth465 Posted July 25, 2014 Share Posted July 25, 2014 Easier ways to get a 10% OE yield in my opinion. Link to comment Share on other sites More sharing options...
Laxputs Posted July 25, 2014 Author Share Posted July 25, 2014 I'm eager to hear of those companies if you feel like linking threads to them. And curious what makes this one hard. Link to comment Share on other sites More sharing options...
Myth465 Posted July 27, 2014 Share Posted July 27, 2014 Actually its a nice idea depending on what you are into. Looks like you have basically found a vastly improved CLUB. All of the weaknesses there seem to be fixed up here. My only issue is I wouldn't pay 10X CF for a gym type business. I think most business are worth 10x cash flow, so I dont see a lot of upside due to re rating. More likely you buy at 10x CF, they continue to grow and fix things up and shrink the share-count, and you make money the long hard way. Its not bad but I prefer something with fleas at 4x CF where the fleas are slowly being washed away. Then its re rated to 8x or 10x and perhaps grows from there. Good idea, but at this price you are investing in something without much MOS and that has to grow for you to make money. I invest alot in the commodity space, so I am used to buying things at 2-5x cash flow. Though something like Clarke or Holloway Lodging were very cheap earlier in the year. Link to comment Share on other sites More sharing options...
Laxputs Posted July 27, 2014 Author Share Posted July 27, 2014 I'd like to correct one point. The stock doesn't need to grow to make money. It trades around 9x owner's earnings, presently. If it stopped growing it would just buy back stock and pay dividends. Link to comment Share on other sites More sharing options...
valueyoda Posted July 27, 2014 Share Posted July 27, 2014 It simply got too cheap to ignore. Given Marcato's large ownership, I wouldn't be suprised for them to pressure the company into monetizing its real estate assets, as they've attempted at Gencorp and Sotheby's. Link to comment Share on other sites More sharing options...
Myth465 Posted July 27, 2014 Share Posted July 27, 2014 I'd like to correct one point. The stock doesn't need to grow to make money. It trades around 9x owner's earnings, presently. If it stopped growing it would just buy back stock and pay dividends. True but again you would own a none growing gym stock trading at 9x CF. If you are ok with those returns, then its a pretty good idea. Link to comment Share on other sites More sharing options...
Laxputs Posted July 28, 2014 Author Share Posted July 28, 2014 Just want to point out we are talking owner's earnings. After tax figures. 11% yield with a company that can reinvest at over 15% ROE. Yes, I'd be happy owning a sustainable company with those numbers. Link to comment Share on other sites More sharing options...
premfan Posted July 28, 2014 Share Posted July 28, 2014 Just want to point out we are talking owner's earnings. After tax figures. 11% yield with a company that can reinvest at over 15% ROE. Yes, I'd be happy owning a sustainable company with those numbers. But its a gym.... Any successful models? Link to comment Share on other sites More sharing options...
Laxputs Posted July 28, 2014 Author Share Posted July 28, 2014 Well maybe this is where people can diverge based on opinion. In theory, a gym business can work. This is one that appears to be working. I like the risk/reward, numbers, management, etc. Therefore I buy. I mean the line of reasoning that asks for prior successful models means that one can't invest in not only anything that hasn't worked in the past, but nothing new as well. I don't like to remove either of those from my options. Link to comment Share on other sites More sharing options...
premfan Posted July 28, 2014 Share Posted July 28, 2014 Well maybe this is where people can diverge based on opinion. In theory, a gym business can work. This is one that appears to be working. I like the risk/reward, numbers, management, etc. Therefore I buy. I mean the line of reasoning that asks for prior successful models means that one can't invest in not only anything that hasn't worked in the past, but nothing new as well. I don't like to remove either of those from my options. Its a nice gym i worked out in the one in summerlin nevada. I was curious if there were any successful previous models. I know gold's gym franchises. I believe the upfront capital cost is around 4 million for a franchisee. I think a franchise model for lifetime would be great. Although, the upfront capital cost might be too much for a typical owner/operator to handle. Great gym, as jim cramer mentioned awhile ago " Its the whole foods of the gym industry". Link to comment Share on other sites More sharing options...
yadayada Posted July 28, 2014 Share Posted July 28, 2014 I rather look for idea's that can potentially go up several times over the next few years with large margin of safety. That is kinda the whole point of actively investing. There are 50k stocks out there, why get stuck up on a company like this with an ok business and a fair valuation? Might as well buy a index fund then. Saves yourself some time and you get almost the same return. And how is competition not a problem? In my town 5-6 years ago, there was like 1 gym, and it cost 60+ euros a month or so. Now it costs me about 15 euro's for the same thing with like 5-6 gyms out there. They basicly compete on price. There is some stickiness though. Also where do you get that 9x FCF multiple, it is trading at 13x earnings. Depreciation is a real cost imo. And it does not even generate much FCF as it is still expanding. Link to comment Share on other sites More sharing options...
Laxputs Posted July 28, 2014 Author Share Posted July 28, 2014 I too am obviously looking for the greatest returns. But if I can't find enough ideas that look like multi-baggers (I like to own around 6 stocks), then I just buy the next best return that will yield me over 10% (that I understand/in my circle of competence, and that meets the rest of the requirements regarding metrics, management, debt, margin of safety, etc.). I think the numbers state that this will return over 10% per year over the next several years, but questioning whether there is a large enough margin of safety is fair. I think LTM is in a unique spot given the quality and scale of their gyms. I don't think they haves a moat, per se. Though I think that given they have the nicest facilities, and can compete against any type of cross fit or spin class given their budget, and their advertising budget, and that they will likely be the biggest square footage gym in the area, all works significantly in their favour in regards to the competitive landscape. But I could be wrong about competition affecting their future earnings. So perhaps I should set a more strict standard for my margin of safety requirement. It isn't asset protected. So there is real downside if I interpret competition or unforeseeables inaccurately. Maybe that's 15% return instead of 10% return. To me, it's a good company at a good price. Link to comment Share on other sites More sharing options...
Laxputs Posted July 28, 2014 Author Share Posted July 28, 2014 Also, please send me your multi-bagger ideas. Link to comment Share on other sites More sharing options...
yadayada Posted July 28, 2014 Share Posted July 28, 2014 Might be wrong, but look at Texhong, GNCMA, ASPS, EHL, OPRX , OUTR, Future Bright. Those are my large holdings now. You have to do some digging on them, to appreciate what is really going on though. I saw you posting Enterprise, that one is a favorite of mine as well. Link to comment Share on other sites More sharing options...
Myth465 Posted July 29, 2014 Share Posted July 29, 2014 I would say you arent looking hard enough. You also seem to really like gym businesses... You can get 9% in the market with no risk in perferreds / convertible debentures. I agree with yada. IF you want 10% thats relatively easy to find... Link to comment Share on other sites More sharing options...
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