Stock Learning

For investors, this Life Partner might not be good for you …

Life Partners is a viatical/life insurance settlement provider based in Waco, Texas.   LPHI acts as dealmaker – it arranges for buyouts of life insurance policies in cases where the death of the policyholder can be anticipated within a finite timespan.  It earns fees by connecting these potential settlors with investors, who agree to front the money and pay the premiums, in exchange for rights to the policy benefit face amount, which is received following the settlor’s subsequent death.  Clients are mostly individuals who are referred to Life Partners through financial planners, lawyers, insurance agents and CPA’s.

It is the belief of Citron that this company has too many red flags that investors are advised to consider carefully:

Red Flag # 1. Egregious fees.

We believe Life Partners is charging their retail investor clients egregious fees.  Are LPHI’s clients getting a good deal?  It is hard to believe.  LPHI makes money by connecting sellers and buyers of life insurance policies and collecting an upfront fee.  However, it is difficult to understand how clients of Life Partners can make attractive or even positive returns when fees of $500,000 per transaction are layered into the IRR calculation.

Join the Club – At Your Own Risk

Citron receives email every day from investors asking us what to look for in companies to avoid.  It is our opinion that in the current economic climate any company is that highly debt-leveraged with high fixed costs that depends on the US consumer will have big problems.  Add into that equation a business model that NO ONE has ever proven successful and we have Lifetime Fitness.  (NYSE:LTM).

Even though this stock is badly beaten down this year, we believe the equity will eventually go away as this chain of 77 health clubs will carry a debt load that will weigh on them like a 300 pound barbell and leave investors sweating.

Before we go into the financials, let us look at a few key fundamental points about the health club industry.

1.  Health Clubs are the ultimate discretionary purchase.  In 2007, as soon as the economy turned soft, gym memberships dropped for the first time in more than a decade. http://www.usatoday.com/money/advertising/adtrack/2008-11-16-gyms-recession-ads_N.htm

2. Lifetime’s strength is also their biggest weakness: their customers are not obligated to long-term contracts but instead pay monthly.  As Lifetime’s CFO told the Denver Post, “When somebody looks at that Visa statement and they know that times are tougher, they’re making a decision a little bit quicker to leave the club if they’re not utilizing it,”   http://www.examiner.com/a-1694083~Health_clubs_offer_discounts_as_economy_falters.html

3. Operating high-end health clubs is a business model that no public company has proven successful in the best of economic times.  How will Lifetime hold up in these recessionary times?  Lifetime’s model is also becoming increasingly dependent on “other income” – spa and trainer services, currently 1/3rd of total revenue, which are just as vulnerable to a spending downturn.