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Tickers in this Article: LTM
Getting in shape is no longer just a New Year's resolution.

In its annual Topline Report, the Physical Activity Council, a coalition of sports-related trade groups, found that more than 60% of Americans frequently engaged in fitness sports in 2012. That growing interest in health and fitness has led to a huge surge in the number of people joining fitness clubs.

According to the International Health, Racquet and Sportsclub Association, health club and gym memberships jumped to 51 million in 2012, up from 41 million in 2005.

And looking forward, with Americans increasingly fighting back against obesity and diabetes, and with baby boomers focused on staying in shape as they retire, the $21 billion domestic health and fitness industry is growing quickly.

That's one of the reasons I'm bullish on an industry-leading fitness club company. With 106 locations and more than 800,000 members, it's already a juggernaut. But with plans to double its expansion rate in the next two years, it's in a great position to capitalize on America's growing interest in health and fitness. That has shares up nearly 300% in the past five years.



Life Time Fitness (NYSE: LTM) is a $1.9 billion company that owns and operates high-end health clubs strategically located in affluent neighborhoods near large cities. Its facilities are big, usually more than 100,000 square feet, and offer a wide variety of services from personal trainers and rock climbing to spas and child care.

  
 Life Time Fitness 
 Life Time Fitness has 106 locations and more than 800,000 members. 
Life Time is already an industry leader. But it's on the cusp of expanding its market-leading footprint with a multi-year expansion strategy that's creating an opportunity for investors.

For the past five years, Life Time has been scaling back on growth to strengthen its financial profile, opening just three new locations a year for an expansion rate of 3%. But starting in 2014 that number is set to double to 6%, with plans to open a new location every other month.

Life Time is relying on two key strategies -- location and scale -- to drive the success of its new facilities.

Its new openings are located in high-income areas, including in New York and California, which helps insulate its key demographic from economic weakness.

The six facilities due to open next year will also be large, ranging from 60,000 to 175,000 square feet. The sheer size of these facilities gives Life Time a competitive advantage in its ability to offer a broad array of high-margin services.

The accelerated expansion strategy is set to continue through 2015. The new openings are intended to drive revenue growth acceleration in the next two to five years. And with Life Time's strategic approach to the market, they could also increase the company's margin power and profitability.

After paying down debt aggressively in the past five years, Life Time looks well capitalized to finance growth. Its debt-to-equity ratio has fallen from 115% in 2008 to 67%, also a big discount to its peer average of 186%. That gives Life Time room to absorb economic volatility and also increase its operating leverage with more debt.

That strong financial profile is also enabling Life Time to support shareholder value, purchasing 240,000 shares for $12.1 million during the third quarter. That leaves $191 million left on an existing stock buyback program announced in August after the expiration of a previous $60 million buyback.

Risks to Consider: Membership growth rates have recently slowed from previous years. Although the company is seeing higher revenue and income from each client, new members are a bigger driver of incremental earnings growth than existing members.

Action to Take --> With shares recently falling 15% from the 52-week high, Life Time's forward price-to-earnings ratio of 16 is a discount to its 10-year average of 18 and peer average of 26. If Life Time traded with the same valuation as its peers, shares would jump to $73, which is a 50% increase from current levels.

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