Lean, Fit and Ready to Run by Tom Sullivan
Summary: Town Sports International (CLUB) had an EPS of $0.50 last year, projects $0.80 this year and $1 in 2008. It's P/E of 21 for 2007 is low versus fitness equipment provider Life Fitness' (LTM) estimated P/E of 31. And the $451 million health club chain's cash flow rose to $95.7m in 2006 from $81.6m in 2005. So why is TSI stock at $17, down from April's high of $24? TSI suffered from bad timing—its 2006 IPO was blighted by Bally Total Fitness' (OTC:BFTH) legal troubles and eventual bankruptcy. There's also a lack of Street interest, recent stock market volatility and perhaps fear of TSI's non-diversified concentration in the northeastern U.S. and Switzerland only. But Barron's likes TSI's small, serviceable, versatile and omnipresent gyms—so that members can easily access a gym anywhere. Membership has risen 30% since 2004, and membership dues have risen 1-3% yearly without attrition. TSI plans to add 15 more clubs to its 152 worldwide. With just 3% of the US health club market, there's room to grow. Conservative accounting practices and good demographics with mostly young-ish, wealthy baby boomer clients ensure its future. Barron's sees a $25 stock by 2008.
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