Are New Year's Resolution Stocks Temporary?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So far this year, I have hesitated on going to my gym that I frequent 4-5 times a week. It isn’t because staying/getting fit is a dreaded resolution of mine for the New Year, but because it often is for many others. Having more people in the gym often results in longer lines, parking difficulties, overcrowding in the common areas like locker rooms, and simply more new people that don’t know where they want to go in the gym or what they are doing. Getting fit or losing weight is often not the top resolution though, and for 2013, it is no different. It is third in many user polls behind getting out of debt, which is second, and saving more money, which is first. Perhaps you can conquer the two most popular New Year resolutions by capitalizing on the fitness and health industry.
Life Time Fitness
Many gym goers are familiar with the popular big players in the fitness industry like Gold’s Gym, Curves International, 24 Hour Fitness Worldwide, and LA Fitness. LA Fitness acquired 171 clubs from Bally Total Fitness near the end of 2011. They are still expanding nationally as they continue to take advantage of the national trend of getting fit. Gold’s Gym isn’t going anywhere either. Twenty-four hour facilities of all types continue to pop up to cater to individuals that prefer to work out late into the night or early in the morning. However, these aren’t available for the average investor because they are privately owned entities, leaving just a few options left. In my opinion, Life Time Fitness (NYSE: LTM) is a solid pick if you are considering a national gym to invest in.
How can you not like a well-run fitness company that has grown its EPS gradually and not had a single negative EPS quarter in over a decade? In an industry where fitness companies come and go, margins are narrow, and some file for bankruptcy not once, but twice (Bally Total Fitness’s first bankruptcy took the stock from $37/share to under $0.37/share), what Life Time Fitness has been able to do is pretty impressive. With only 105 centers (up from 92 in 2011), they fall significantly short to that of a LA Fitness which now has over 500 clubs across the US and Canada. But this isn’t a bad thing. One major problem fitness companies have is over-expanding and not having a customer base in a geographical area to justify the enormous and risky upfront cost of a new facility and new equipment.
As a stock, there’s no sweat for considering Life Time Fitness. Memberships grew year-over-year by over 40,000 members and as a result total revenues increased 11.1% for the three months ended September 30, 2012. Memberships-per-center-square-footage went up from 14.05 (2011) to 14.24 (2012). It is easy to see why net profit margins went up year-over-year from 9.14% to 10.90%.
In the past year, the stock is up over 10% and I believe it can go higher towards 2007 levels and exceed $60/share. CEO Bahram Akradi has over 25 years in the fitness industry and has been part of this company since 1992. He has been able to take the company this far, when many along the way have failed with their fitness companies, and I have little doubt he can take it even further. The next earnings announcement is February 21, 2013.
I liked GNC then and like it more now given that there has been about a 20% pullback in share price in the past 6 months. The story for GNC hasn’t changed and they have already over doubled their net income annually from $50.9 million for 2009 to $127.6 million in 2011. I believe 2012 will exceed expectations and the stock could easily exceed $40 again later this year.
In an economy where it seems like the retail store model is endangered to the online model, I believe GNC is one of the exceptions. Many new gym goers (like those in the January to March range each year) usually are overwhelmed by all the information posted online about which supplements or vitamins do what and which are superior. Yes, online supplement companies might have a price advantage, but for many novices and even some of the regulars, getting supplements in person is more important. The ability to ask questions to GNC representatives is reassuring for those that want control and knowledge of what exactly is going into their bodies. GNC’s results support this as their same store sales increased 9.8% and store count domestically increased by 36 stores during the 3rd quarter of 2012 alone. Retail sales, operating income, and international franchise revenue all increased 15.5%, 38.8%, and 35.6%, respectively.
With nearly 8,000 locations under the GNC brand name and a solid online presence at GNC.com, GNC is synonymous with the supplement and fitness industry. While their 1.3% dividend is small, it is still a consistent dividend at only a 15% payout ratio to go along with what I consider a steal of a stock at these current stock prices. GNC the past 4 straight quarters have surprised analysts by an average of 14.13% to the upside. Their next earnings date is set for February 11, 2013 and I predict another strong quarter that beats analyst’s opinions.
Weight Watchers International
This past week on Bloomberg TV, CEO David Kirchhoff of Weight Watchers (NYSE: WTW) discussed the future of the 50 year old company and how 2011 was its best year as a company despite the economy. In the past month, the stock has climbed over 16% with the 10% spike this week accounting for most of that change. The past decade, EPS has gone from below $0.50/share regularly each quarter to now over a buck. Their latest quarter surprised analysts on the upside by over 12% with $1.20/share.
In an industry where diet plans aren’t as original of an idea or business model as when Weight Watchers first started a half century ago, Weight Watchers continues to stay ahead of the competition and break new ground with new programs to meet customer’s needs. Today Weight Watchers relies less on the in-person approach and more on their online business. This has resulted in a reduction in cost of revenues last quarter by 1.4%, and this has increased gross margins by 1.9%.
David Kirchhoff talked about how Weight Watchers 360 is the next step for the company. It is a new program implemented in December of 2012 that focuses on long-term lifestyle changes and getting people to take control of their environment. The main goal of the program is to create permanent lifestyle choices. I believe this is the product that will help push the company further ahead from competitors.
One thing to consider with Weight Watchers, though, is how much they spend on marketing and their spokespersons. Marking expenses increased 7.1% the 3rd quarter of 2012 versus the same quarter in 2011. I am not sure if these expenses are justified when net income declined 16.5% for the same quarter. Their next earnings date is set for February 11, 2013 as well.
Are Resolutions Temporary?
In my opinion, all 3 stocks – Life Time Fitness, GNC, and Weight Watchers – don’t necessarily need to be viewed as companies to capitalize on for the New Year or seasonal pop. Life Time Fitness has shown that it grows annually consistently and its CEO just passed 20 years with the company. GNC is relatively new to the market and I wouldn’t be surprised to see it slowly approaches triple digits in share price in the next few years. The supplement industry is nearly $30 billion and over half of American adults use supplements. It is the perfect time to be a supplement retailer. Weight Watchers 360 might be more of the same, just packaged and renamed, but it is the change that counts. This change keeps them in mainstream media and when you have a balanced endorsement team that includes people like Jessica Simpson, Jennifer Hudson, and Charles Barkley that maintain positive images of themselves in the public eye, you are able to support the brand into the future.
mikecart1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!