New Club Openings And LT Digital Expansion Will Strengthen Future Outlook

Key Takeaways

• Strategic expansion and asset-light investments expected to drive revenue growth and margin improvements through new clubs and higher-margin segments.
  
• Focus on debt management and enhanced membership engagement to stabilize revenue and optimize income, leveraging digital subscriptions and improved member retention.
  
• Reliance on sale-leasebacks, high debt, and ambitious expansion plans expose the company to interest rate risks and execution challenges, impacting margins and financial flexibility.

Catalysts

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

• Life Time Group Holdings plans to open 10 to 12 new clubs in 2025, with the potential to increase openings in subsequent years, leveraging its robust pipeline. This expansion is expected to drive future revenue growth.
  
• The company is focusing on maintaining its current debt levels while using free cash flow and proceeds from sale-leasebacks to finance expansion efforts, which should improve net income through optimized capital structure.
  
• Life Time's digital subscription base, LT Digital, is growing rapidly, which can enhance revenue through increased membership engagement and provide cross-selling opportunities for higher-margin products like nutritional supplements.
  
• The company has seen record membership retention, contributing to revenue stabilization and growth, and plans to further improve retention in 2025 by enhancing member experience, driving both top-line and margin improvements.
  
• Life Time is strategically investing in asset-light growth opportunities, such as nutritional supplements and health optimization services, expected to enhance in-center revenue and potentially increase net margins through higher-margin business segments.

Life Time Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Life Time Group Holdings's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $387.2 million (and earnings per share of $1.73) by about March 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 analysts price target, the company would need to trade at a PE ratio of 30.1x on those 2028 earnings, down from 40.5x today. This future PE is greater than the current PE for the US Hospitality industry at 23.3x.
• 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 9.32%, as per the Simply Wall St company report.

Life Time Group Holdings Future Earnings Per Share Growth

Risks

• The company's reliance on sale-leaseback transactions for funding expansion could expose it to interest rate fluctuations and market demand for real estate, impacting net margins and free cash flow.
  
• Maintaining debt levels at $1.5 billion, while growing revenue and EBITDA, could strain financial flexibility, particularly in a rising interest rate environment, impacting net income through increased interest expense.
  
• The ambitious expansion plan of opening 10 to 12 new clubs in a year entails execution risks, including potential delays and cost overruns, which could pressure earnings and operating margins.
  
• The heavy reliance on asset-light growth initiatives, such as LT Digital and nutritional supplements, involves execution risks and shifting consumer preferences, impacting projected revenue growth and profitability if these initiatives do not perform as expected.
  
• Emphasizing high personalization and premium experiences could limit the company’s ability to manage operating costs efficiently, posing a risk to EBITDA margins if membership or in-center revenues fall short of expectations.

Valuation

• The analysts have a consensus price target of $36.462 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 $45.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $387.2 million, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $30.17, the analyst price target of $36.46 is 17.3% 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.