Recently, Fool contributor Michael Lewis wrote about a fitness club owner and operator, Town Sports International Holdings, Inc. (NASDAQ:CLUB). Town Sports has advanced significantly since 2009, from around $1.5 per share in March 2009 to around $13 per share in September 2012. However, the stock has retreated to around $9 levels of late, within striking range of its 52-week low. Lewis is of the opinion that it could be “an attractive buy” at its current trading price. Is it true? Let’s find out.
A declining quarter with Hurricane Sandy impact
Town Sports International Holdings, Inc. (NASDAQ:CLUB) has experienced a decline in its comparable club revenue in two out of the last five years. In 2009 and 2010, comparable club revenue decreased 5.6% and 4.3%, respectively, due to the recession and its impact on consumer spending. In the fourth quarter of 2012, due to the negative impact of Hurricane Sandy, its comparable club revenue also decreased 1.1%. Total member count also dropped by 12,000 to 510,000 in Q4 2012.
Its fourth-quarter net loss came in at $453 million, due to nearly $3.2 million charges of fix asset impairment from four clubs that suffered from damages caused by Hurricane Sandy. A bad fourth quarter might be the reason behind Town Sports’ share price plunge. I expect that Town Sports could improve earnings in the first quarter of 2013, as the company probably will not incur impairment charges caused by Hurricane Sandy’s impact anymore.
What makes me worried about Town Sports is its weak balance sheet. As of December 2012, it had a negative stockholders’ equity of $55.5 million, while the cash on hand was $37.76 million. In addition, the company employs significant leverage in its operation. The debt was a whopping $310 million.
Peer comparison
At its current trading price, Town Sports International Holdings, Inc. (NASDAQ:CLUB)’s total market cap is around $223 million. The market is valuing the company at around 5 times EV/EBITDA. Compared to its bigger peer, Life Time Fitness, Inc. (NYSE:LTM), Town Sports seems to be much cheaper.
Life Time Fitness, the operator of more than a hundred centers under the LIFE TIME FITNESS and LIFE TIME ATHLETICSM brands in around 26 major markets in the U.S., is worth nearly $1.8 billion on the market. At a trading price of around $43 per share, the company is valued at 7.45 times EV/EBITDA. In terms of profitability, Life Time Fitness has a much higher operating margin at 18.5%, while the operating margin of Town Sports is only 9.37%.
Foolish bottom line
With a huge leverage, negative equity and a low operating margin, I do not think Town Sports could be a good fit in the long-term portfolio of value investors. Investors might buy Town Sports only to speculate on the expected improving operating performance in the first quarter of 2013.
The article Is This Fitness Operator a Good Buy Now? originally appeared on Fool.com and is written by Anh HOANG.
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