Lifestyle businesses are on the rise. People are spending a lot more time thinking about their health in this day and age. You can see it in the food industry, where an emphasis on eating actual food (imagine that!) has reached many fast food companies and a lot of sit-down chain restaurants, as well. The rapid ascent of stocks like Chipotle (CMG) or even Whole Foods (WFM) (prior to this year, that is) are signs that the culture as a whole is treating lifestyles differently.
The trend extends to what people are doing with their bodies as well as what they’re putting into them. Fitness stocks are currently experiencing a bit of a renaissance, as the number, variety, and relative health of these companies takes off.
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The rapid growth of fitness stocks arguably means that a significant portion of them have already graduated into the mid- and large-cap world, while we here at Equities.com tend to keep our focus on small- and micro-cap companies. Take wearable tech company Fitbit ($FIT). Ten years ago, the company didn’t even exist. Today? After a June IPO, the company is worth more than $8.5 billion, a nearly 45% gain from its IPO.
The same is true for a lot of fitness-related companies, with many expanding so fast that the potential for major growth that drives our interest in small caps is long gone. Under Armor (UA) has done a lot more than “protect this house,” they’ve grown nearly 1,500% in ten years to a market cap of more than $20 billion. Share prices in yoga pants maker Lululemon (LULU) have expanded like a pair of lycra pants, exploding over 350% since the start of 2010 to just under $9 billion in total value. And earlier this year, Minnesota-based fitness club Life Time Fitness was taken private in a deal that valued the company at more than $4 billion.
This rapid growth amongst industry leaders has had the side effect of creating a space for smaller players to set up shop and potentially thrive. There are still some smaller players that could be poised to jump onto the current fitness boom and grow rapidly. Either that or get crowded out of the market – it’s impossible to say for sure at this point. But the potential exists in our culture’s state of flux to find tremendous value in some of these companies.
Planet Fitness ($PLNT)
Based out of Newington, New Hampshire, Planet Fitness has grown to 1,000 locations by positioning itself as a “judgement free zone” where exercise novices can get started on a program with assistance and without being surrounded by the sort of fitness-obsessed types that can frequently make other gyms harder to tolerate. So, essentially, a real-life Average Joe’s gym.
The company went public just last week, and it’s already flirting with the upper-range of small-cap stocks, with a market cap just shy of $1.75 billion. The company has some real bright spots…particularly for a small-cap stock. Revenue growth has been steady and dramatic, but the cost of that growth hasn’t prevented the company from remaining consistently profitable for over five years. That said, this soon after the IPO, there’s a distinct lack of data, and a real chance that the markets haven’t really made up their minds yet.
Town Sports International (CLUB)
Town Sports isn’t necessarily a name that would be familiar to most, but that’s because its clubs – spread across New York, New England, the Mid-Atlantic region, and Switzerland – all operate under separate names. However, anyone living in New York is likely aware of one of the 120 New York Sports Clubs located in New York, New Jersey, and Connecticut.
In a lot of ways, Town Sports is not the ideal play for the growing fitness trend. For starters, the company is anything but new or hip. Founded in 1973, it has seen revenues decline in recent years due to net member loss, something that has thrown the company into the red. If your interest in the upcoming SoulCycle IPO is because “this isn’t your father’s health club,” well, Town Sports IS your father’s health club. It’s also currently valued at just over $50 million, putting it firmly in the sort of volatile, hazardous micro-cap territory that can bring with it a whole lot of risk.
That said, there’s still some definite appeal for this stock from the perspective of the value investor. Part of the company’s lack of profitability has been due to a pivot where they shifted some 124 clubs to “high value low price” clubs that represent a different approach intended to entice new members. Memberships here will cost as little as $20 a month, representing a steep discount over most competitors. The investment thesis has to come down to this: either you believe in the new strategy’s ability to attract a lot of new members, or you don’t.
If you do, though, there’s plenty of reason to believe that now is the time to get into the stock. The company’s P/S ratio is a stellar 0.12, and its P/C ratio is 0.53. Moreover, the recent collapse in share price would appear to have entrenched the stock firmly in oversold territory, with a 14-day RSI of a little over 35. Even there, the RSI was well below the 30 level traditionally interpreted as oversold for weeks prior to a mid-June rally.
If you believe in the comeback fueled by the new low-price model, this is a stock that’s hard to pass up. If you don’t, that would make this a falling knife, and the value play should have no appeal.
The current emphasis on high-intensity training has been one of the hallmarks of the current fitness craze. Working harder for shorter periods has been shown to produce better results than the slow-and-steady approach. However, the idea is nothing new. In fact, Arthur Jones, the inventor of the Nautilus Machine, initially started focusing on it as early as 1970, when he first started selling his exercise machines.
Today, Nautilus is a major manufacturer of exercise equipment, with a variety of brands for weight training systems that includes Bowflex, Universal, and Schwinn Fitness.
The company is well-established by this point, but it recently took a significant tumble in early August after investors didn’t like what they heard from a Q2 earnings report failed to inspire shareholders, despite meeting analyst expectations for profits and revenue. The company’s growth in profits and margins took a hit last year, declining sharply from 2013 after growing steadily in years prior.
The company, though, sports an impressive gross margin of over 50%, strong analyst opinions, and significant revenue growth. It’s also positioned in a relatively agnostic position in terms of the health club war. While health clubs that rely on membership may rise and fall with trends, Nautilus can potentially be a presence at whatever club happens to be in the zeitgeist at the moment.
Steiner Leisure (STNR)
Of course, food and fitness aren’t the only tines in the lifestyle fork. There’s also the broader wellness industry, where comfort is the name of the game. And one such entry into that industry comes in the form of Steiner Leisure, the owner and operator of a variety of different spa properties. The company has a large footprint, operating facilities on cruise ships, at resorts and urban hotels, and through a number of subsidiaries.
A look into the numbers show that Steiner was showing steady growth in revenue right up until FY 2014, when revenue plateaued and profits dove sharply into the red, something likely attributable to the company losing its contract with Celebrity Cruises (RCL) in addition to a large impairment charge in Q4 of 2014 related to tax benefits for its Ideal Image brand.
The company’s stock has been steadily gaining back ground lost in early 2014 though, gaining nearly 60% since early October of last year. Despite these steady gains, it still sports a forward P/E ratio under 15 and a P/S ratio under one.
In the event that Steiner has navigated a rocky 2014, there’s reason to believe that the stock will continue to produce profits steadily into the future, adding a healthy boost to the stockholder’s portfolio.
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