Is Life Time Fitness the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Life Time Fitness (NYSE: LTM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Life Time Fitness.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.6% Fail
  1-Year Revenue Growth > 12% 11.5% Fail
Margins Gross Margin > 35% 39.9% Pass
  Net Margin > 15% 9.4% Fail
Balance Sheet Debt to Equity < 50% 65.2% Fail
  Current Ratio > 1.3 0.54 Fail
Opportunities Return on Equity > 15% 10.4% Fail
Valuation Normalized P/E < 20 18.16 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only two points, Life Time Fitness doesn't look perfectly fit. Even with double-digit growth, the fitness center operator has balance sheet concerns and isn't generating the returns on equity that we prefer to see.

The fitness craze has boosted an entire industry into the limelight. Although Nike (NYSE: NKE  ) has been serving the athletic market for decades and pioneered many of the most profitable trends in the business, newer upstarts Under Armour (NYSE: UA  ) and lululemon athletica (Nasdaq: LULU  ) have emerged to challenge Nike and have been successful in taking consumers in different directions for their fitness needs. That's the same trend that Life Time Fitness is trying to tap into with its fitness centers, and the company is unusual in that most of its peers are privately held.

Even though the stock plunged yesterday after announcing first-quarter earnings, Life Time Fitness actually put up some decent numbers. Revenue rose nearly 12% with earnings jumping 22%. But even with expectations of those figures continuing throughout the full year, investors were expecting higher figures -- and they punished the stock by about 8%.

Still, when a company executive suggests that growth could be slowing, it pays to listen. Last month, Life Time's CFO said he doesn't see membership "going through the roof," which may not bode well for its future growth prospects.

For Life Time Fitness to keep bulking up, it needs to accelerate growth and get its debt under control. Without that, it could take a long time for the company to get anywhere near perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Life Time Fitness may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Life Time Fitness to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Under Armour and Lululemon Athletica. Motley Fool newsletter services have recommended buying shares of Under Armour, Nike, and lululemon athletica, as well as creating a diagonal call position in Nike. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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