LTH - Life Time Group Holdings: Potential With Pickleball

2023-11-27 16:39:07 ET

Summary

• Life Time Group Holdings, Inc. is benefiting from new memberships and has seen a 30% increase in its stock value this year.
• The company has over 160 locations and plans to expand further, focusing on pickleball, personal training, and small group training.
• While the company's revenue growth is a positive, its high level of debt is a concern for investors.

Like many Americans I've been drawn in by the allure of pickleball. In my opinion, it's a fun, engaging sport that is relatively easy to play, lets you socialize with fellow pickleball enthusiasts, and it's a great way to get some exercise!

Combining my love of stock investing with pickleball, I decided to research one company I think is benefiting (and will continue) to benefit from this sport that is growing in popularity.

This company has many pickleball counts and is up over 30% YTD. That company is Life Time Group Holdings, Inc. (LTH).

Let's dig into specifics to see if this stock might be a good play for fellow pickleball and stock lovers.

The Company

Life Time Group Holdings, Inc. offers premium health, fitness and wellness experiences to numerous communities within the United States. Aside from pickleball, Life Time provides numerous services, amenities, and activities to their members. Some of which include, yoga, tennis, basketball, personal training and nutrition coaching. Below is the full list, the company mentioned on their most recent 10-K filing :

In their last annual filing, the company had 160 centers across 29 states and one Canadian providence. The below illustrates Life Time's footprint as of December 31, 2022:

In 2023, the company has opened 10 new locations thus far and plans to open two additional centers in Q4 2023.

Moat and Opportunity

I believe there is a significant opportunity for Life Time to continue to expand. As mentioned above the company has over 160 locations and management noted they have over 80 locations in various stages of discussion and development.

The company is focused on an asset-light model for these new locations; locations such as malls, retail locations, and vertical residential areas.

Life Time's strategy includes focusing on pickleball, personal training and small group training. The below is a graphic from a recent investor presentation illustrating the company's ongoing initiatives and strategies:

Going back to pickleball, I think Life Time is wise to make this a key initiative. Pickleball is the fastest-growing sport for the third year in a row! Over 36 million people play pickleball and the sport's average growth over the last three years is roughly 160%.

Life Time currently has over 500 permanent courts with the goal of becoming the largest pickleball provider in the United States.

I don't necessarily think Life Time has a moat as there are numerous gyms and fitness centers throughout the country. Additionally, pickleball can be played outside, and it does not seem as though the costs are quite as extensive compared to other sports such as racquetball.

If pickleball continues to grow as it has throughout the last few years and doesn't become a fad, Life Time will likely benefit from having a large number of permanent courts. If the company does become the largest pickleball provider and the sport continues to grow in popularity, Life Time should be in a very advantageous position.

Management

Bahram Akradi is the founder, Chairman, and CEO of Life Time Group Holdings. Akradi founded the company in Minnesota in 1992 . Life Time was a public company from 2004 until it went private in 2015. In late 2021 , Life Time went public again with Akradi still at the helm.

Robert Houghton is the company's CFO. Houghton has held this position at Life Time a little over a year. He previously had management positions at C.H. Robinson, Sherwin Williams, and Valspar.

Below are the Glassdoor ratings for Life Time as well as Akradi. I'd say these scores are solid however I've found most founder-led companies tend to have higher scores than the ones shown below:

Financials

For the third quarter 2023, Life Time brought in revenue of roughly $585 million which is an increase of nearly 18% compared to Q3 2022.

The company ended the quarter with roughly 784,000 center memberships which is an 8% increase compared to Q3 2022. Total subscriptions for Q3 2023 were approximately 830,000. Lastly average revenue per membership increased to $722, which is a 9% increase compared to the prior year's quarter.

It appears an increase in club usage is leading to more revenue per membership and as the following graphics, from last quarter's investor presentation, illustrate:

The company is using 2019 as a comparison given the irregularities caused by the COVID-19 pandemic.

The company's balance sheet does worry me as the company doesn't have enough current assets to cover their current liabilities. Additionally, Life Time has some serious debt as you can see below:

More debt in today's economy means higher interest expense, and you can clearly see the company's interest expense grew in Q3 2023:

Risks

One significant risk facing the company is whether or not pickleball will become a fad . It is certainly a fair question as racquetball was once very popular and now is certainly not.

I don't think pickleball will be a fad as it's more accessible and far less strenuous on the body. That is why pickleball is popular with older generations looking for a fun, physical activity. However, this is a competitive marketplace with numerous national and local gyms. Plus, many cities are adding pickleball courts to public parks.

As I previously mentioned, another risk is that the company has significant debt on their balance sheet. In this high interest rate environment having such a higher level of debt will cut into net profits.

Valuation

Life Time is similar to many of the other companies I have reviewed. It is certainly not a cheap stock. As you can see from the below valuation metrics from Seeking Alpha, the overall value grade is a "D+." Life Time is higher than the sector median for many of these metrics such as the P/E ones I have shown below:

The company's forward PE ratio has increased over the last month as you can see below:

I would be a more willing buyer should the stock price drop closer to October levels in the mid to high teens, which is mostly to the sector median.

Conclusion

There are certainly some positives for the company as revenue, the number of memberships, and revenue per membership have all increased compared to last year. I like that the company is founder-led and believe Akradi is an experienced leader. I think Life Time's initiatives and strategies are focused, sensible, and seem to working thus far. I also think pickleball will last compared to sports such as racquetball, thus the strategy to become the largest pickleball provider in the United States could pay off.

However, pickleball is rather accessible. One doesn't have to have a gym membership to play pickleball. I think pickleball could be a factor when making a decision about a membership and in cold weather areas pickleball could bring in some hardcore players. However, I'm not sure pickleball by itself would draw in new members.

From a financial perspective, I'm concerned with the company's level of debt as it is substantial, and I believe Life Time is overvalued currently.

I love pickleball, but I don't love Life Time, at least not at this price with this amount of debt on the books.

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