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Growth Investors Need to Put This IPO on Their Watchlist

By Alex Dumortier, CFA – Jul 31, 2015 at 1:07PM

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SoulCycle could be a genuine growth opportunity -- one that's already highly profitable, at that.

The brutal drop in oil prices that began last year cut ExxonMobil's second-quarter revenues by a third and its earnings by half. With earnings per share coming in 10% below Wall Street's forecast, the shares plumbed levels not seen since mid-2012 this morning. Given that ExxonMobil is the fifth most valuable company in the S& 500, its performance may be dampening sentiment today morning: The Dow Jones Industrial Average (^DJI 1.09%) was flat and the broader S&P 500 (^GSPC 1.46%) was up just 0.15% at 1 p.m. EDT. The Nasdaq Composite was up 0.36%.

Source: Nicki Dugan Pogue, under a Creative Commons license.

SoulCycle: An IPO for your watchlist
As a value investor, I wear a
skeptic's hat when it comes to growth company initial public offerings, as many of them are overpriced (or simply appear to be so -- my skepticism has cost me dearly in overlooking several extraordinary growth stories such as Google). 

That isn't always the case, however, and any worth his salt investor should always to be on the lookout for new, high-quality businesses anyway -- the shares will be priced attractively at some point. For this reason, investors ought to add SoulCycle to their watchlist.

The cycling studio chain and "lifestyle brand" filed for an IPO yesterday, and its offering document makes for some interesting reading. Before I get serious, let's get our laughs in. As Business Insider highlighted, the prospectus contains some truly cringeworthy stuff:                                                                     

The experience is tribal. It is primal. And it is fun.

Pack. Tribe. Community. [...] In becoming part of our community, our riders are instilled with greater awareness of not only their bodies but also their emotions. We believe this awareness leads to healthier decisions, relationships and lives.

Yes, it's all very New Age, but there is a reality behind this language. Beyond the workout it delivers, SoulCycle places an emphasis on creating a community at each of its studios. Anecdotally, if the Facebook feed of one of my college classmates is anything to go by, SoulCyclists appear to be very loyal. They feel like they are part of a community and the relationship goes beyond that of customer to fitness studio. That's critical in a sector that is highly competitive. 

What isn't touchy-feely is the growth and profitability numbers SoulCycle has managed to put up -- the most rational analyst will get excited about those. 

Over the course of two years between 2012 and 2014, SoulCycle nearly tripled its annual revenues and better than tripled net income, with an average operating profit margin over the past three years of 23.4%. That profitability has enabled the company to finance virtually all of its growth out of cash flow from operations ("We generate strong Free Cash Flows"), leaving it with a clean balance sheet. 

And the long-term growth opportunity is there: With 38 studios at the end of March, SoulCycle believes it can reach 250 studios domestically (not to mention the possibility of international expansion). The company says it is well positioned to open at least 10 to 15 new studios per year for the next several years.

I've been to one of SoulCycle's locations in Washington, D.C., and I didn't enjoy the experience -- the music blaring from ceiling-mounted speakers during the class was at an eardrum-endangering volume (they actually had ear plugs available at reception desk). I wasn't a satisfied customer (at my age, I'm probably not part of the target demographic, anyway), but SoulCycle's prospectus suggests it could eventually create another happy tribe -- its shareholders.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook, Google (A shares), and Google (C shares). 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 Motley Fool has a disclosure policy.

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