Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Life Time Fitness (NYSE: LTM) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Life Time Fitness's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Life Time's key statistics:
LTM Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
34.6% |
Pass |
|
Improving profit margin |
10.3% |
Pass |
|
Free cash flow growth > Net income growth |
(120.5%) vs. 48.4% |
Fail |
|
Improving EPS |
44.1% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
67.4% vs. 44.1% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
LTM Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
2.6% |
Pass |
|
Declining debt to equity |
(17.4%) |
Pass |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Life Time benched its weight today, as it earned five out of seven passing grades. However, Life Time's free cash flow has shrunk drastically during our tracked period, perhaps as a result of expansion-related construction and equipment-purchasing initiatives. Despite this weakness, the company's shareholders have enjoyed a remarkable growth over the past three years, and the stock is relentlessly recovering from its 2009 lows. Let's dig a little deeper to see how Life Time is working to maintain or grow its position.
Life Time recently announced that it was setting up a joint venture with Globe University, a Minnesota-based accredited college, to put would-be personal trainers through a standardized training process. This is probably necessary, as industry employment is set to rise 50% by 2023, and because there's relatively little effort made to standardize or systematize the education of fitness trainers. At present, there's a wide array of certifications and degree programs available to entry-level trainers, with just as wide an array of prestige and industry acceptance. Since Life Time is one of the few prestige fitness "brands" in a highly fragmented industry, its support of one course of accreditation over others could lead to better trainers industrywide.
Life Time is also slated to open health centers in Reston, Virginia and Montvale, New Jersey in 2013, followed by six more centers across the country by the first quarter of 2014. It is quite evident that Life Time Fitness is trying to build a robust platform for sustainable growth through both geographical expansion and new programs. This aggressive plan is also likely to be behind the divergence between net income and free cash flow, but that shows no sign of slackening yet.
Putting the pieces together
Today, Life Time Fitness has some of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
