Equity Investment Presentation

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LIFE TIME FITNESS, INC
Equity Investment Presentation
Richie Hartz
Kaushik Andra
Ha Da Jang
Heziyou Xu
Diana Yang
Diana Yang
Iris Yijin Zhang
April 30, 2013
1
AGENDA
Introduction
Company Overview
Stock Performance
Industry Overview
Financial Analysis
Valuation
Recommendation
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
2
COMPANY PROFILE
• The Healthy Way of Life Company
• Designs, develops and operates sports and athletic,
professional fitness, family recreation and spa centers
• Helps clients achieve total health objective, athletic
aspirations by doing what they love
• Types of memberships: individual, couple, family
• First center opened in 1992
• Headquarters: Chanhassen, Minnesota
• Ticker: LTM
• Market Cap: $1.89 Billion
• Employees: 20,000
• Number of centers: 105 (as of Feb 28, 2013)
Source: LTM 2012 Annual Report Item 1 P1-2
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
3
COMPANY HISTORY
1992:
Life Time Fitness
founded, first club
opened in Minnesota
1992
2004:
Life Times completed its
IPO with NYSE
2000 2001
2000:
Life Time expanded
offering to include
proprietary line of
nutritional products
and supplements
2012:
Acquired Racquect
Club of the South (RSC)
2004
2001:
Life Time formalized
its Athletic Events
division
2008
2008-2011:
Expanded to
about 15 states
2011 2012
2011:
Opened its first
location in Ontario,
Canada
Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; MarketLine Report
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
4
5 AREAS OF PROGRAM SERVICES
5
Sports
Fitness
Lifestyle
Family
Total Health
Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
BUSINESS COMPETITIVE STRENGTHS
Comprehensive programs and services
• Most Life Time destinations operate 24/7 with certified professionals
and professional equipments
A value propostion and member-focused approach to
encourage membership loyalty
• Different types of membership plans, variety of services with
membership
Convenience for members
• Centers situated in easily accessible areas and centrally located among
residential, business and shopping districts
• 24/7, child center services, convenient spa and café
Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; LTM 2012 Annual Report Item I P2-3
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
6
Business Competitive Strengths – Cont’d
An established and profitable economic model
• Within first 3 years after openning a new center: ramp memberships and
optimize memberhsip mix and pricing
• Once mature: maintain tight expense control
• Revenue growth: 11.2% ($1.1bn), EBITDA growth: 18.8% ($324.7mil)
Disciplined and sophiscated site selection and
development process
• Build or lease new centers
• Analyze drive patterns, demographics, cultural and competitive criteria
• Remodel centers by utilizing a wholy owned construction subsidiary
Committed and experienced senior management team
Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; LTM 2012 Annual Report Item I P2-3
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
7
REVENUE DECOMPOSITION
Source: LTM 2012 Annual Report
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
8
GROWTH STRATEGY
Build and acquire
new centers
Grow membership
dues
Increase products,
programs and
services revenue
2012: opened 3 large
format centers,
acquired Racquet Club
of the South
83 of 105 centers have
reached maturity
Increase sales of
current in-center
products and services
2013: open 3 large
format centers
Optimize dues through
price increases and
improving the mix of
membership
Introduce new
products & services
Source: LTM 2012 Annual Report Item 1 P3-4
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
9
SWOT ANALYSIS
Strengths
Weaknesses
Comprehensive programs & services
Concentrated business operations
Strong economic model
Unable to attract and retain members
High value services
Seasonality
Robust financial performance ensures financial
stability
Reliance on credit facility and ability to access
additional capital
Reliance on acquisition to grow
Subject to claims (construction, fitness-related)
Opportunities
Threats
Inorganic and organic expansion plans to boost
top-line growth
Intense competition
Favorable outlook for the global leisure
facilities
Stringent regulations (advertising, sales, service
providers)
Potential litigation against intellectual property
rights
Source: LTM 2012 Annual Report Item 1A P19, Item 7 P38; MarketLine Report
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
10
HISTORICAL FINANCIALS
Source: Calculated based on LTM 2012 Annual Report Financial Statements
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
11
2013 Q1 REPORT
(Quarter ended in March 31)
2013 Q1
2012 Q1
Total Revenue
$290.7 million (8.3% growth)
$268.4 million
Net Income (Profit margin)
$28.1 million (9.67%)
$25.7 million (9.58%)
EBITDA (% of sales)
$82.0 million (28.2%)
$75.7 million (28.2%)
CapEx (% of sales)
$59.1 million (20.3%)
$38.5 million (14.3%)
Rent Expenses
$9.7 million
$9.6 million
Operating Expenses/Sales
82%
82%
Return on Sales (EBIT/Sales)
18%
18%
Interest Coverage
8.55
7.70
Basic EPS
0.68
0.62
Debt
$698.9 million
$704.4 million
BV Equity
$1085.7 million
$1072.9 million
BV D/E
63.5%
65.7%
Source: Calculated based on LTM 2013 Quarterly Report Financial Statements
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
12
KEY FINANCIAL RATIOS
2010A
Profitablility Ratios
Return on Equity (ROE)
Return on Asset (ROA)
Profit Margin
Liquidity Ratios
Current Ratio
Quick Ratio
10%
5%
9%
0.58
0.45
2011A
2012A
10%
5%
9%
0.61
0.45
10%
5%
10%
0.60
0.43
2013E
10%
5%
9%
0.59
0.44
2014E
10%
5%
9%
0.59
0.44
2015E
10%
5%
9%
0.59
0.44
2016E
10%
5%
9%
0.59
0.44
2017E
10%
5%
9%
0.59
0.44
2018E
10%
5%
9%
0.59
0.44
Leverage Ratios
Debt to Equity
Interest Coverage
73%
24
72%
37
66%
32
70%
30
70%
30
70%
30
70%
30
70%
30
70%
30
Operating Efficiency Ratios
Receivables Turnover
Inventory Turnover
Payables Turnover
157
32
30
165
28
28
122
24
20
145
28
25
145
28
25
145
28
25
145
28
25
145
28
25
145
28
25
2
11
12
1
2
13
13
2
3
15
18
0
2
13
14
1
2
13
14
1
2
13
14
1
2
13
14
1
2
13
14
1
2
13
14
1
Receivable Conversion Period
Inventory Conversion Period
Payment Deferral Period
Cash Conversion Cycle
Source: Calculated based on LTM 2012 Annual Report Financial Statements
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
13
STOCK PERFORMANCE
Source: Yahoo Finance
14
INDUSTRY OVERVIEW
• Primary Industry: Fitness
–
Secondary industry: Leisure Facilities, Health
and Fitness clubs
• Major products and services offered by
industry
–
Tennis centers, gyms and fitness centers, ice
and roller rinks, dance centers, swimming
pools, weight-loss supplements
• No major players in this Industry
–
No players hold a market share larger than
5.0%
• Industry Structure Highlights
–
–
–
Capital Structure- medium
Revenue volatility- low
Regulation level- light
Source: IBISWorld
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
15
U.S. OVERWEIGHT AND OBESITY DISTRIBUTION
Concerns over obesity will continue to drive fitness industry
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
16
PREVALENCE OF OBESITY IN U.S.
Source: CDC
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
17
INDUSTRY OUTLOOK
• Increasing awareness of healthy lifestyle and stabilization of U.S economy will keep
industry in a growth phase
–
Revenue for the industry expected to rise at an average annual rate of 2.9% to $29.9 billion in 2018
• Large and growing health and wellness industry
–
–
Retiring baby boomer generation will create strong opportunities for gyms and fitness clubs
Younger than 17-market presents opportunity as childhood obesity concerns continue
• Slow expansion of existing establishments
–
–
Most major markets already heavily saturated
Establishments only expected to increase at an average rate of 1.1%, primarily coming from expansions
of large-scale gyms
• Continued support from government
–
Reduction of Healthcare costs
Source: IBISWorld
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
18
PORTER’S FIVE FORCES
Threat of New Entrants: Low
Large capital investment on property, equipment, and acquisitions
Threat of Substitute Products: High
Traditional methods of exercise and self-instruction through online
materials and alternative weight loss programs
Bargaining Power of Buyers: Moderate
Variety of membership packages to choose from;
Attractive price and program mix to grow membership dues
Bargaining Power of Sellers: Moderate
Property and professional equipment
Intensity of Competition: High
Concentrated business operations;
Other centers, clubs, profit/non-profit organizations
Source: LTM 2012 Annual Report Item 1 P12, Item 1A P16
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
19
MACROECONOMIC OUTLOOK
• Key External Drivers
– Participation in sports, per capita disposable income, number of adults aged 20-64
• Stabilization of U.S economy and modest employment growth
• Minimal exposure to events in Europe
• Impact of Healthcare regulation and reform
• Fed will continue easy-money policies
Source: IBISWorld
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
20
Valuation — Trading Comparables
Enterprise Value /
Life Time Fitness
7.6x
11.6x
17.0x
1.8x
2.09x
7.2x
15.47x
Ba l l y Total Fi tnes s Hol di ng Corpora tion
NM
NM
NM
NM
NM
NM
NM
12.6x
24.9x
67.3x
NM
0.95x
7.6x
31.22x
Town Sports Interna tiona l Hol di ngs Inc.
5.2x
10.6x
19.3x
NM
1.04x
5.2x
13.78x
Rena i s s a nce Inc.
7.7x
14.9x
16.1x
1.7x
NM
NM
NM
10.5x
17.8x
37.2x
2.1x
1.77x
8.4x
12.09x
KOSHIDAKA Hol di ngs Inc.
4.7x
7.5x
10.5x
3.8x
0.78x
NM
10.73x
Ca nl a n Ice Sports Corp.
6.5x
13.7x
28.8x
0.8x
NM
NM
NM
NM
13.6x
32.7x
41.8x
2.4x
NM
NM
NM
NM
8.5x
10.6x
50.4x
1.5x
3.72x
8.6x
9.55x
13.6x
4.7x
8.7x
8.1x
32.7x
7.5x
16.6x
14.3x
67.3x
10.5x
33.9x
33.0x
3.8x
0.8x
2.1x
1.9x
3.7x
0.8x
1.7x
1.0x
8.6x
5.2x
7.4x
8.0x
31.2x
9.5x
15.5x
12.1x
LTM EBITDA
324.1
$50.96
$46.54
LTM EBIT
208.5
$66.62
$55.08
Grupo Sports Worl d, S.A.B de C.V.
Goa l s Soccer Centres pl c
High
Low
Mean
Median
Li fe Ti me Fi tnes s
Impl i ed Pri ce_Mea n
Impl i ed Pri ce_Medi a n
LTM Diluted EPS
2.68
$91.03
$88.56
Tangible BV
NTM Forward
EBITDA
Ardent Lei s ure Group
Diluted EPS
NTM Enterprise Value
Forward Total
Revenue
Forward EBITDA
(in $USD millions)
Hea l thwa ys Inc.
EBIT
Price
LTM Tangible
BV/Share
26.29
$54.04
$50.24
NTM Revenue /
Share
29.6
$48.93
$30.89
NTM EBITDA
360.2318
$64.27
$69.21
Source: CapIQ
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
P/E
NTM EPS
2.98
$46.13
$36.03
21
Valuation — WACC Analysis
WACC Calculation
Capital Structure
Total Debt
Market Value of Equity
Debt-to-Total Capitalization
Equity-to-Total Capitalization
698,859
$1,923,628.74
26.6%
73.4%
Cost of Debt
Cost of Debt
Tax Rate
After-tax Cost of Debt
1.4%
35.0%
0.9%
Cost of Equity
Risk-free Rate
Market Risk Premium
Beta
Cost of Equity
1.7%
9.1%
1.08
11.5%
WACC
8.7%
Source: Bloomberg
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
22
Discounted Cash Flow Analysis— Fair Value
Fair Value Calculation
Enterprise Value
Less: Debt
Add: Cash
2,487,374
(698,859)
13,694
Implied Equity Value
1,802,209
Shares Outstanding
41,646.000
Fair Value of LTM
DCF implies that stock is trading
around its fair value
$43.27
Current Stock Price
$46.19
Implied Share Price Sensitivity
Implied Share Price Sensitivity
Perpetuity Growth Rate
2.0%
2.5%
3.0%
3.5%
4.0%
7.7%
$45.55
$50.62
$56.78
$64.42
$74.14
7.7%
38.49
42.36
46.23
50.10
53.97
8.2%
$40.23
$44.40
$49.37
$55.41
$62.90
8.2%
37.17
40.94
44.71
48.48
52.25
8.7%
$35.72
$39.19
$43.27
$48.15
$54.07
8.7%
35.90
39.57
43.24
46.90
50.57
9.2%
$31.84
$34.77
$38.17
$42.18
$46.96
9.2%
34.66
38.23
41.81
45.38
48.95
9.7%
$28.46
$30.96
$33.84
$37.17
$41.10
9.7%
33.46
36.94
40.42
43.90
47.38
INTRODUCTION
COMPANY
43
WACC
WACC
43
TerminalTerminal
MultipleMultiple
5.5x
INDUSTRY
6.0x
6.5x
7.0x
VALUATION
7.5x
23
VALUATION SUMMARY
Lifetime is currently trading at its fair value
Current Price
$46.19
52-Week Range
DCF
$52.43
$39.10
$62.90
$28.46
•
•
52-Week High: $52.43
52-Week Low: $39.10
•
2.0%-4.0% Perpetuity
growth rate
8.2%-9.7% WACC
Mid-Year Convention
•
•
•
Trading
$10
INTRODUCTION
$57.47
$41.91
LTM EBITDA
$30
COMPANY
7.0x – 9.5x LTM EBITDA
of $324mm
$50
INDUSTRY
$70
VALUATION
24
RISKS & DECISION DRIVERS
Why We Chose Lifetime
(1)
GICS Diversification
(2)
Sharp drop in stock price
(3)
Leader in U.S. Market
Final Thoughts
(1)
Low intrinsic Value
(2)
Fragmented Industry
(3)
Reliance on discretionary income of consumers
(4)
Limited growth opportunities in domestic market
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
RECOMMENDATION
Watch List
INTRODUCTION
COMPANY
INDUSTRY
VALUATION
Life Time Fitness
Questions?
27
Valuation — DCF ANALYSIS
2012A
1,126,947
11.2%
2013E
1,248,270
10.8%
Fiscal Year Ending December 31,
2014E
2015E
2016E
1,369,229
1,486,617
1,596,619
9.7%
8.6%
7.4%
2017E
1,694,911
6.2%
2018E
1,776,907
4.8%
Operating Expenses
EBIT
Margin (%)
918,720
208,227
18.5%
1,026,991
221,279
17.7%
1,126,508
242,722
17.7%
1,223,086
263,531
17.7%
1,313,588
283,031
17.7%
1,394,456
300,455
17.7%
1,461,917
314,990
17.7%
D&A
% of Sales
EBITDA
Margin (%)
115,016
10.2%
323,243
28.7%
125,117
10.0%
346,396
27.8%
137,241
10.0%
379,962
27.8%
149,007
10.0%
412,538
27.8%
160,032
10.0%
443,063
27.8%
169,884
10.0%
470,339
27.8%
178,103
10.0%
493,093
27.8%
EBIT
208,227
221,279
242,722
263,531
283,031
300,455
314,990
(72,697)
34.9%
115,016
(224,194)
(77,448)
35.0%
125,117
(210,661)
(84,953)
35.0%
137,241
(205,384)
(92,236)
35.0%
149,007
(208,126)
(99,061)
35.0%
160,032
(207,560)
(105,159)
35.0%
169,884
(203,389)
(110,247)
35.0%
178,103
(213,229)
(110,247)
(1,493)
56,794.4
(568)
89,057.1
(552)
111,623.9
(517)
135,925.1
(462)
161,329.0
(385)
169,232.7
(385)
169,233
Sales
Growth (%)
Less: Income Taxes
Effective Tax Rate
Plus: D&A
Less: CapEx
% of Sales
Less: Change in Working Capital
Unlevered FCF
1,349
Terminal Value Assumption
Terminal Value
Implied Perpituity Growth Rate
Terminal value
Perp
EBITDA
7.3%
493,093
493,093
7.3%
314,990
nm
178,103
(213,229)
24.4%
Terminal
Value
1,988,255
1,986,620
Enterprise
Valuation
2,487,374
2,485,739
Net
Debt
685,165
685,165
Equity
Valuation
1,802,209
1,800,574
EV/ EBITDA
5.0x
5.0x
Share Price
Premium
Current
Implied to Current
$46.19
$43.27
-6%
$46.19
$43.24
-6%
Source: LTM 2012 10-K
INTRODUCTION
nm
3.0%
6.5x
3,077,202 3,205,108
3.0%
PV of
CFs
499,119
499,119
Perpetuity Growth
EBITDA Exit Multiple
'13E - '18P
CAGR
COMPANY
INDUSTRY
VALUATION
28
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