Ten Club Openings Will Face Risks Yet Unlock Future Potential

Key Takeaways

• Ambitious expansion may strain finances if market changes impact sale-leaseback transactions and cash flow, affecting margins and profitability.
  
• High capital expenditures and reliance on digital strategies carry execution risks that could restrict earnings growth if projections aren't met.
  
• Strong revenue growth, increased membership retention, debt reduction, and diversified revenue streams indicate robust financial health and potential for sustained earnings growth.

Catalysts

Provides health, fitness, and wellness experiences to a community of individual members in the United States and Canada.

• There may be concerns that Life Time Group Holdings' accelerated expansion plans, including the planned opening of 10 to 12 new clubs in 2025 and the extensive new club pipeline for 2026 and 2027, could result in financial strain. This reliance on leveraging sale-leaseback transactions and cash flow to finance growth may not be sustainable if market conditions change or if rent costs rise, impacting net margins and profitability.
  
• With a stated intention to maintain current debt levels at around $1.5 billion, the company’s capacity to invest in additional growth opportunities could be limited. Higher interest rates or changes in the credit market could increase interest expenses and pressure net income if cash flow growth does not meet expectations.
  
• Although Life Time is focusing on using its growing free cash flow and sale-leasebacks to fund expansion, maintaining high levels of capital expenditure presents a risk, especially if projected same-store sales and membership growth do not materialize as expected, potentially impacting EBITDA margins.
  
• The company anticipates strong retention rates and increased revenue per membership; however, if market conditions shift, this could lead to lower membership renewals and reduced in-center spending, adversely affecting revenue growth.
  
• Life Time’s ambitious rollout of new digital and asset-light growth strategies, such as its digital subscription and nutritional supplements, presents execution risks. If these efforts to drive incremental revenue do not meet expectations, there could be a significant impact on earnings growth and realization of strategic objectives.

Life Time Group Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Life Time Group Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Life Time Group Holdings's revenue will grow by 10.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 10.1% in 3 years time.
• The bearish analysts expect earnings to reach $361.2 million (and earnings per share of $1.69) by about May 2028, up from $156.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, down from 45.9x today. This future PE is greater than the current PE for the US Hospitality industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 5.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Life Time Group Holdings Future Earnings Per Share Growth

Risks

• Life Time Group Holdings has demonstrated robust financial performance with total revenue in 2024 increasing by 18.2% to $2.621 billion, primarily driven by a 19.1% increase in membership dues and enrollment fees as well as a 16% increase in in-center revenue, suggesting a strong upward trend in revenue growth.
  
• The company achieved a 28.5% increase in adjusted EBITDA to $177 million for the fourth quarter, with an adjusted EBITDA margin of 26.7%, indicating widening net margins through effective leveraging of operations and cost control, which could positively impact earnings.
  
• Life Time has reached record levels in membership retention, which directly supports stability in its revenue stream, and with a pipeline of 10 to 12 new club openings anticipated for 2025, scalability is evident, potentially enhancing future earnings.
  
• The strategic refinancing and reduction in debt levels are expected to reduce cash interest expenses, which can have a positive impact on net income, contributing to improved financial health and increased earnings.
  
• The company is expanding its asset-light growth opportunities, such as a fast-growing free digital subscription base now exceeding 1.7 million subscribers, without any marketing expense, and the growth in nutritional supplements that further broaden revenue streams, likely benefitting total revenue and profit margins.

Valuation

• The assumed bearish price target for Life Time Group Holdings is $28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Life Time Group Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $361.2 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 8.8%.
• Given the current share price of $32.97, the bearish analyst price target of $28.0 is 17.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.