Hot Stock: Life Time Fitness

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You don’t have to be an exercise buff to enjoy going to the gym. With fitness club memberships on the rise, owning a piece of a workout facility will do your portfolio good.

Connor Browne, co-portfolio manager of Thornburg Investment Management’s Thornburg Value Fund, is fan of Chanhassen, Minn-based Life Time Fitness Inc. (NYSE: LTM). It operates extensive health clubs that have indoor pools, rock climbing walls and packed spinning classes among the usual weights and workout equipment. “They’ve redefined the health club industry,” he says.

The company is benefiting from the health kick lifestyle in a big way. Browne says that over the last decade U.S. gym memberships have seen a 5% compound annual growth rate, yet less than 20% of people go to a club. He thinks that number will grow as more people—especially in the U.S., where the population has an obesity problem—try and shed a few pounds.

A lot of those new membership dollars are, and will continue, flowing Life Time’s way. “They build a better mousetrap,” says Browne. “It’s a much larger club than their competitors.” They also don’t charge much to join, about $70, and they don’t have any problems filling a club with 10,000 members. The company has seen incredible growth over the last decade too; revenues were $130 million in 2001, says Browne, today it’s over $1 billion.

While the company was hit during the recession, it’s making a comeback. It currently operates about 100 clubs, but Browne expects it to build about 10 new ones a year between now and 2023. With an expanding membership base, he thinks the company can grow their earnings at 15% a year for the next several years.

Life Time’s shares did drop about 22% on February 1 after its preliminary fourth quarter results came in below analyst expectations. Still, profits increased by 23% and revenues rose by about 10%. With the stock down, now may be the best time to buy. It’s trading at $43 a share, but several analysts think it could climb to between $50 and $54.

Browne’s not worried about the stock price drop. With more clubs being built at the end of this year and the beginning of next, revenues will climb even further over the next 12 months. “Revenues may get a little slower (in the short-term), but they’ll pick up nicely,” he says. “They’re opening a lot of new clubs and will continue growing their base in the U.S.”

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