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The Best Play in the Fitness Market

Shares of Life Time Fitness (NYSE: LTM  ) popped 10% the other week. Before that, its stock had been flat over the last 12 months. The boost in its stock price comes as activist investor Marcato Capital took a stake in the company. Marcato Capital now owns 7.2% of the company. It is also worth noting that although shares of Life Time Fitness have underperformed the broader market, the company has managed to meet or beat earnings in each of the last four quarters.

Mick Mcguire runs Marcato Capital. Mick is a former partner in Bill Ackman's Pershing Square Capital. Mick founded Marcato Capital with the help of Ackman in 2009. The fund is an activist firm that has positions in Sotheby's and Dillard's.

What Marcato sees in Life Time Fitness
One thing is for sure: fitness is becoming a bigger part of our everyday lives. Life Time Fitness has slightly less than 800,000 members and generates about 63% of its revenue via membership dues. Another 31% comes from in-store revenue, such as dining and personal trainers. Life Time Fitness touts its monthly payment structure as an advantage over other fitness clubs, whereas other clubs require semi-annual or annual memberships.

Life Time Fitness is slowing down fitness-center expansion, but another area that it will focus on is in the expansion of in-center services. It is still early in its addition of spa services, dining options, and kids' programs. Over the last four years, in-center revenue grew faster than membership revenue.

One potential thing that Life Time Fitness might be looking to do to unlock value is forming a REIT. That comes as Piper Jaffray notes that Life Time Fitness might announce such a plan at the company's investor day in June.

Other ways to capitalize on fitness
As participation in fitness activities grows, so is the activewear-apparel market. The other beauty of the activewear market is that it is also used as lifestyle and casual wear. Thus, some of the other plays to invest in the increase in fitness are the apparel markers, which include Nike (NYSE: NKE  ) and Under Armour (NYSE: UA  ) .

Nike has managed to grow its revenue at an annualized rate of 9% over the last 10 years. Under Armour has been gaining traction with sports teams, such as uniforms. It is also gaining strength in shoes and other areas.

Earlier this year, Under Armour launched Speedform Apollo, a lightweight running shoe. That is a big positive, considering NDP Group found sales of lightweight running shoes jumped 22% from 2012 to 2013. The other area of growth for Under Armour is women's athletic apparel. The company hopes to take advantage of some of the marketing mishaps that lululemon athletica has had by breaking into the yoga pants market. The beauty of yoga pants is that they are not just for athletic settings but also casual wear.

The upcoming World Cup can be a big positive for Nike. It will likely use the worldwide event to market its brand and various apparel. One of Nike's biggest opportunities is in the direct-to-consumer segment. This has been a focus in countries like China. As well, Nike remains rather diversified across various regions.

How shares stack up
Life Time Fitness trades at a P/E ratio of slightly less than 14 based on next year's earnings estimates. It is a unique investment in that it is one of the only publicly traded fitness centers. Town Sports International Holdings is a key competitor but much smaller, with a market cap that's about a tenth the size of Life Time Fitness.

The key issue for Life Time Fitness is that its debt-to-equity ratio is high at 83%. Even still, Life Time Fitness' P/E-to-growth (PEG) ratio is enticing, coming in at 1.1. Looking at the other two companies mentioned, they are not as compelling from an investment standpoint. Nike trades with a PEG ratio of 2 and Under Armour's is 2.5.

Bottom line
Fitness is quickly transitioning from a leisure activity to a necessity. It remains to be seen what Marcato Capital has in store for Life Time Fitness, but for investors looking to increase their exposure to the growing fitness industry, Life Time Fitness is worth a closer look.

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Marshall Hargrave

Serial entrepreneur, startup junkie, registered investment adviser

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