Expanding Horizons And Innovative Streams Propel Growth In Health And Leisure Industry

Key Takeaways

• Strong membership retention and expansion plans into new markets are expected to significantly bolster revenue growth.
  
• Diversified revenue streams and prudent financial leverage management aim to improve earnings and support stable financial health.
  
• Economic challenges and execution risks in new ventures may influence membership growth, revenue, and profit margins amidst high leverage and competitive pressures.

Catalysts

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

• Life Time Group Holdings has seen strong membership retention, which is critical for generating stable and increasing membership dues—expected to bolster revenue growth.
  
• The company plans for robust expansion with 10 to 12 new locations in 2025 and possibly more in 2026 and 2027, enhancing its future revenue potential through penetration into new markets.
  
• Emphasis on developing ancillary revenue streams such as dynamic personal training and branded products (e.g., Life Time Health supplements) is expected to drive diversified revenue streams and improve overall earnings.
  
• A significant pipeline of over 100 deals, including ground-up developments and strategic club takeovers, could provide revenue growth opportunities while maintaining capital efficiency.
  
• Financial leverage management with a target range of 1.75x to 2.25x debt to EBITDA ratio, supported by substantial real estate assets, is anticipated to enhance credit standing and potentially reduce interest expenses, thus improving net margins.

Life Time Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Life Time Group Holdings's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $278.4 million (and earnings per share of $1.32) by about October 2027, up from $142.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $219.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2027 earnings, down from 33.0x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.23%, as per the Simply Wall St company report.

Life Time Group Holdings Future Earnings Per Share Growth

Risks

• The company's reliance on significant new club openings and expansions may be risky if these projects face delays or cost overruns, which can impact revenue and increase expenses, thus affecting margins and cash flow.
  
• Competitive pressures in the health and leisure market could erode Life Time's pricing power and membership growth, potentially impacting future revenue and profit margins.
  
• Economic headwinds or macroeconomic changes could influence customer spending on discretionary services like health clubs, impacting Life Time's membership growth and revenue.
  
• Execution risks regarding the expansion of asset-light business models, such as digital subscriptions and LTH products, could affect expected revenue from these new income streams.
  
• High leverage, despite improvements, could impose risks if interest rates rise or market conditions change, affecting the company's financing costs and net margins.

Valuation

• The analysts have a consensus price target of $28.42 for Life Time Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.4 billion, earnings will come to $278.4 million, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $22.75, the analyst's price target of $28.42 is 19.9% higher.
  
• 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.