October 24, 2011 - 2:33pm EST by
2011 2012
Price: 8.53 EPS $0.41 $0.65
Shares Out. (in M): 23 P/E 20.0x 13.0x
Market Cap (in $M): 196 P/FCF 5.0x 4.1x
Net Debt (in $M): 250 EBIT 90 100
TEV ($): 446 TEV/EBIT 5.0x 4.5x

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Note EBIT #s above are EBITDA
CLUB is a compelling long given a cheap valuation and a q3 earnings report I believe will be blown out.   For the three value investors that are not familiar with CLUB, please read the previous two reports on vic.   
First the short term thesis.   CLUB will blow out q3 earnings.   In a presentation posted on their website ( ), CLUB reported they gained 5000 net new members in Q3 vs a 3000 net member loss in Q3 2010.   I will use this info to demonstrate why I believe CLUB will blow out earnings:  

Q2 2011 EBITDA = 24.3 Million; Guidance for Q3 2011 = $21 Million
Q3 is seasonally slower than Q2 as personal training revenue declines during the summer months.   Additionally, electricity is higher during the summer months.   That being said, let's look at what Q2 and Q3 EBITDA were in 2010:
Q2 2010 EBITDA = 19.3 Million ; Q3 2010 EBITDA = $17.7 Million
In 2010, the company was in a cyclical decline.   Starting in Q1 2011, CLUB has been in a cyclical upswing.   As mentioned earlier, in 2010 Q3 CLUB lost 3000 net members but in 2011 they gained 5000 net members.   Further, Q2 2011 net member adds y/y were significantly better than 2010.  All this adds up to a very strong quarter for CLUB.   I believe that all lost revenue for personal training will be offset by new members added in Q3 and the benefit of a full quarter of the 7000 members added during Q2.  There are other reasons to believe CLUB will blow out the number:
1)  Insider buying has been strong all year but Private Equity board member Bruckman bought $170,000 worth of stock the end of August and early September, two months into the quarter.   
2)  Both Q1 and Q2 were a blowout vs. managements guidance, sending the stock up 20+% each time.   
So CLUB will report great numbers on Wednesday.   But that's not the reason to own the stock.   CLUB is very cheap and will eventually be taken private by PE in the next 1-2 years.   General financials for CLUB are as follows:
$250M of Net Debt by year end 2011, paying ~7% interest.   Management says they will have net debt of $200m end of 2012.   As noted above, managements guidance the last 12 months has been very conservative.  CLUB will open 2 units next year (and 2 this year in Q4).   Even assuming the cap ex for the 2 units, CLUB will generate $45-50 Million in FCF next year, or $2.00 a share.   Yes, this is lightly taxed but CLUB has a tax asset and considerable PP&E to keep their cash taxes on the low side for years.   Further, CLUB will end 2012 with a mere 2x net debt.   In the past, this business has supported 4-5x net debt in the hands of PE.   I believe that it still can in the future.   CLUB's peak EBITDA was around $115 Million (2007) and it bottomed at around $70 Million (2010) (runrate not annual, annual was higher).   Maintenance Cap ex is around $20m a year but I use $25m to be conservative.   Even at $70 Million of trough EBITDA, CLUB had $45 Million in cash flow to pay interest payments.   Even with $400 Million of debt @ 10% interest they would be FCF positive, at the absolute bottom of the cycle.   
I believe fair value of CLUB is around $15 a share by year end 2012.   At that price, the P/FCF would be about 7 and EV/EBITDA would be 5.5x trailing #s.   Hardly expensive, especially considering the balance sheet is underlevered.   
Happy to take any questions.  
Math on 2012 FCF:
$30M Cap Ex
$15M Interest
$5-$10M in cash taxes
$45-50M FCF 


Q3 Earnings ; PE takeout
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