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 (NYS: 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.
What We Want to See
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 (NYS: NKE) has been serving the athletic market for decades and pioneered many of the most profitable trends in the business, newer upstarts Under Armour (NYS: UA) and lululemon athletica (NAS: 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.
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.
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At the time this article was published 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.