Is Life Time Group Holdings Inc. (LTH) a Good IPO Stock to Buy?

The fitness industry had been hit hard during the pandemic, as gyms were forced to temporarily close all of their locations and reimburse a large chunk of the yearly membership fees they collected. Now, gyms across the globe are emerging from this period of lockdowns and may be presenting the market with a favorable investment opportunity.

Last week, gym chain LTH Holdings Inc. (LTH) debuted on the NYSE, offering 39 million common shares at $18 per share, raising $702m in the process.

LTH primarily engages in designing, building, and operating multi-use sports and athletic, professional fitness, family recreation, and spa centers in a resort-like environment. With around 700 locations, LA Fitness clubs are usually set in residential locations of most metropolitan areas in the United States and Canada.

The company proposes high-end health and wellness solutions for its customers. It offers fitness centers with equipment, locker rooms, group fitness studios, indoor and outdoor pools, and bistro. Many of these facilities also include indoor and outdoor tennis courts, basketball courts, LifeSpa, LifeCafe, childcare, as well as Kids Academy learning spaces.

Today, I will analyze the LTH’s fundamentals, valuation metrics, and growth prospects to estimate if the fitness chain presents a good investment opportunity after its IPO.

LTH’s financials have slightly rebounded after the opening of its centers, but the company still remains unprofitable

Since it’s listing on Thursday, LTH’s stock has gained 1.9%. This comes as no surprise as the IPO had not been highly anticipated compared to other companies that recently went public. The inability to turn a profit has also led to a lack of excitement surrounding the company’s offering.

LTH’s net sales declined significantly in 2020, down 50.1% to $948.3m, following the Covid-19 lockdowns that negatively impacted most of the company’s recreational centers. In 2021, analysts are expecting a moderate rebound of LTH’s activity, up 8.8% year-on-year to $1.03b. In addition, the cost of revenues is expected to accelerate in the same period, up 6.6% to $703.5m in 2021, weighing on the company’s bottom line.

While the company posted a net loss of $360m in 2020, its yearly loss is expected to accelerate to $406.6m this year, a warning for current and future shareholders.

In terms of balance sheet, LTH’s net debt increased over the past few years, establishing at $4.03b in 2020, up 8.07% year-on-year. LTH’s free cash flow generation is expected to decrease steeply in 2021, down 21.47% to -$283.9m. This steep decline in LTH’s free cash flow comes despite the drastic CAPEX cut observed since the beginning of the pandemic, down more than 60% to $219.2m.

The valuation of the company is currently trading at a reasonable P/S ratio of 3.31x, but its P/B ratio is stretched, with a price twice as high as its book value, which is pretty expensive for a company that is not yet profitable.

Management’s good track record and the virtualization of its product offering should provide opportunities in the long-term

As the world reopens its economies, LTH management is set to increase the holding’s profitability. Management demonstrated it before the pandemic when the holding was delivering a healthy operating margin of 9.29% in 2019 and 11.4% in 2018.

On top of that, LTH has taken advantage of the lockdowns in 2020 to diversify its online fitness offering. The company’s digital products have been enriched with live streaming fitness classes, remote goal-based personal training, nutrition, weight loss support, curated health, fitness, and other wellness content. LTH also provides Apple Fitness+ access, enabling its customers to track health and wellness data.

This shift should provide opportunities for the group in the long term, enhancing the company’s earnings and bottom line. While it will take time to ramp up those offerings to generate substantial results, the risk-reward is skewed to the downside at today’s stock price.

Take away

The COVID-19 presented many companies across a wide range of industries with new challenges to overcome, none as difficult as the complete shutdown of revenue generating activities.

For LTH, closing their doors to the public rendered their business model useless. However, taking out debt in order to stay afloat as well as diversifying their product offering was enough to stay afloat.

I believe as LTH recovers from the forced lockdowns of covid and as the trend of working out at home wanes, LTH is poised to make significant strides in terms of recovering financials. Therefore, I believe LTH presents long-term investors with a new opportunity to ride yet another recovery play.