Watch This “Pickleball” Stock…

Thompson Clark | Smart Money Monday
December 19, 2022

By now, you’ve likely heard of pickleball, the fastest-growing sport in America.

But in case you haven’t, here’s the gist:

• Pickleball is a mix of tennis and ping pong.

• You use paddles instead of stringed racquets.

• And you play with a wiffle ball versus a felt or rubber ball used in other racquet sports.

I’m hooked on pickleball—honestly, I’m borderline addicted. And from what I’ve seen, my affliction is common in the pickleball community. Once you’re hooked, you’re hooked.

According to the Sports & Fitness Industry Association, active participation in pickleball is soaring. In 2016, 2.8 million people participated in the sport. By 2021, that number had jumped 70% to 4.8 million, an 11% compounded annual growth rate.

At a continued 11% annual growth rate, there will be 12 million players by 2030.

Other industry participants anticipate a faster growth rate, though. According to Major League Pickleball, the professional pickleball sports league, pickleball will experience a 10-fold increase by 2030 to 40 million players.

Suffice it to say, pickleball is flourishing and will continue to grow throughout the remainder of the 2020s.

If you haven’t played yet, give it a shot. It’s a ton of fun.

Now, what about investing opportunities?

How to Invest in the Pickleball Trend

A trend is a good starting point, for sure. But you also must look at valuation before investing. That is, how much you are paying to get exposure to this trend.

With regard to pickleball, I’ve identified one way to gain exposure through public markets: luxury gym chain Life Time Group Holdings, Inc. (LTH).

Life Time currently owns and operates 156 locations. This is not a franchise like Planet Fitness (PLNT) or other privately held gym concepts. Its gyms are 100,000 square-foot compounds, with everything from fitness equipment, swimming pools, basketball courts, and—you guessed it—pickleball courts.

Life Time is making a big bet on pickleball through court expansion. Right now, it has over 350 dedicated pickleball courts in its network, which is an accelerated buildout considering it barely had any dedicated courts just a few years ago.

On its recent quarterly earnings call, CEO Bahram Akradi highlighted the company’s expectation to add 60,000 to 70,000 pickleball-specific memberships by the end of 2023. Half of those, he expects, will be brand-new to Life Time.

If this proves correct, the investment to build out pickleball courts will pay off. Revenue from those members is all incremental—meaning it falls right to the bottom line.

LTH Continues to Fight Back

In terms of stock performance, gyms took a hit following the emergence of COVID—and Life Time was no exception. The company first went public in 2004. Private equity saw immense value in its real estate portfolio and took it private in 2015.

The company then came back to the public markets through an IPO in 2021. Since its IPO price of $18 in October 2021, the stock has fallen to just under $13 per share.

Right now, it’s fighting to return to former membership levels. I believe it will get there.

In 2019, adjusted EBITDA was $437 million (a record for the company). And looking out to next year, it’s conceivable that Life Time can exceed those levels and generate $450 million in EBITDA. At $13 per share, that implies a forward multiple of 9 times EBITDA.

Now, there are two key points to note here:

1. Life Time owns the real estate at many of its locations. On a recent call, the company mentioned its real estate portfolio is worth $3 billion. This happens to be greater than the market cap of the company.

There is the potential for the company to execute sale-leasebacks, meaning it sells the property in exchange for a lease. That generates cash.

However, Life Time is not debt-free. It has around $1.6 billion in net debt, plus significant lease liabilities on its balance sheet.

2. Life Time’s growth outlook is strong. At 156 clubs, the company still believes there’s a ton of additional white space for new clubs. And I agree. Despite its already large presence, there’s a path to doubling the club count over the next decade or so.

Take club expansion and the rising appetite for pickleball, and Life Time could see multiple layers of growth in revenue and earnings for many years.

In short, I like the story at Life Time. That said, I want to keep watching it. Its balance sheet gives me some pause, as it carries a lot of debt. In addition, I’m curious if it can continue executing sale-leaseback transactions at attractive rates with interest rates where they are now.

Keep an eye on Life Time Group Holdings, Inc. (LTH). For now, go buy a paddle and start playing!

Mailbag

A quick note on my essay from December 5 on The Walt Disney Company (DIS)…

A few eagle-eyed readers correctly mentioned that Disney no longer pays a dividend. Disney was an active payer of dividends up until COVID. It has since suspended the dividend and not re-initiated it.

Thank you to those who brought this to my attention. My apologies for the confusion. It has been corrected here.

Thanks for reading,

—Thompson Clark
Editor, Smart Money Monday

P.S. Please join me in welcoming our new Yield Shark editor and lead analyst, Kelly Green, to Mauldin Economics! Kelly has 12+ years of experience researching and writing about income-producing dividend stocks, and she’s an expert at pinpointing opportunities that are poised for growth and deliver steady, reliable payouts.

To learn more about Kelly and her work, check out this brief introductory interview.

And if you have any questions for Kelly—or just want to welcome her to the team—you can always reach out to subscribers@mauldineconomics.com.

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