Life Time Fitness Is Weak in the Knees
Wax is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I routinely value stocks utilizing certain metrics that are important to me. I use a simple worksheet template I created some years ago, that gives me all sorts of ratios and numbers, and well, just stuff.
As I say, it's stuff that works for me.
When I come across a stock that either catches my interest, or that piques my curiosity, I will often scan the latest 10-K just to see what's what.
Such was the case with Life Time Fitness, Inc. (NYSE: LTM).
It isn't that I was interested in the stock, because I am not, not in the least. What caught my eye was the repurchase of capital stock, $0.03 per share, compared to the amount paid out as a dividend, $0.0.
I admit that this is a huge source of irritation for me. Some very un-Foolish words come to mind when I see things like this. I guess in short, it just irritates me...a lot.
Certainly many companies that have revolving credit facilities as Life Time does cannot pay dividends without approval from their lenders.
This provision is often included in any borrowing covenants because the lenders want to make sure that the company is not paying dividends with borrowed money.
I personally think the provision is included in the lending agreement because the lenders think if the company is giving money away, which is what a dividend is, that could mean the company isn't going to need to borrow as much money, which cuts into the profits of the lender.
Yeah I know...cynical on my part. But then it is my money, and I don't trust bankers at all.
At any rate, I scanned through the company's 10-K until I found what I was looking for.
"In June 2006, our Board of Directors authorized the repurchase of 500,000 shares of our common stock from time to time in the open market or otherwise for the primary purpose of offsetting the dilutive effect of shares issued pursuant to our Employee Stock Purchase Plan."
"From June 2006 through December 2011, we have repurchased 185,330 shares. In August 2011, our Board of Directors authorized the repurchase of up to $60 million of our outstanding common stock from time to time through the open market or privately negotiated transactions."
"The authorization to repurchase shares terminates when the aggregate repurchase amount totals $60 million or at the close of business on August 17, 2013, whichever comes earlier. As of December 31, 2011, no shares have been repurchased under this program."
I'm sorry; I just think management decisions like this suck. I know they are perfectly legal, and that individual equity investors, aren't being forced to buy a particular stock. I got it.
But if you are going to spend that sort of money, do it so that it creates some sort of baseline value going forward, like debt reduction for example.
In the end I think a fair value for the stock based on FY11 annual financial data is in the $44-$51 range, and with the stock closing recently at $50.44, there really isn't any reason to own it.
The company did generate good free cash flow numbers during FY11 with $3.45 in simple free cash flow, but at the same time the company's leverage ratio (total debt to EBITDA) at 2.5 was above my target of 2.0.
For that matter, none of the company's liquidity ratios were what I consider investment quality, which made me wonder why the company's lenders would keep renewing their revolving credit line, considering the company paid an average annual interest rate during FY11 of 2.93%.
Were I one of the company's lenders, I would certainly take a long look at my risk reward ratio since on the surface, risk seems to outweigh the reward.
The last thing I wanted to look at was the company's growth strategy which I found hinges on building and acquiring new centers, increasing membership and optimizing member dues, and increasing its products, programs, and service revenues.
It was the optimization of membership dues that caught my eye.
The company defines a mature facility as being in operation for at least 37 months, with the company's goal being that a mature facility is operating at 90% of targeted membership capacity.
Of the 101 centers the company operates, 21 of them are less than 37 months old and are currently operating at roughly 67% of target.
The other 80 "mature" centers are also operating at less than their 90% target. The reason given for this by management is...”Due to the economic downturn, our mature centers, in the aggregate, are currently below our 90% target."
While I thought it curious that for the company's mature centers I could not find what their operating efficiency (target) numbers actually were, it was the economic downturn statement that got me.
When the country can't even find two politicians that agree why would any investor believe that economic conditions are going to improve any time soon?
For sure I wish things would improve, and that more and more Americans would have disposable income enough to spend at a gym. But I don't see that happening for quite some time.
Just as I don't see an investment in this company as being a healthy thing for anyone's portfolio.
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