Life Time has had an impressive run over the past six months as its shares have beaten the S&P 500 by 17.6%. The stock now trades at $24.05, marking a 21.7% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Life Time, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we don't have much confidence in Life Time. Here are three reasons why we avoid LTH and a stock we'd rather own.

Why Is Life Time Not Exciting?

With over 150 locations and gyms that include saunas and steam rooms, Life Time (NYSE:LTH) is an upscale fitness club emphasizing holistic well-being and fitness.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Life Time grew its sales at a sluggish 6.4% compounded annual growth rate. This was below our standard for the consumer discretionary sector.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Life Time posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Life Time’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 6.7%, meaning it lit $6.73 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Life Time burned through $12.29 million of cash over the last year, and its $4.12 billion of debt exceeds the $137.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Life Time’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Life Time until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Life Time isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 22.8× forward price-to-earnings (or $24.05 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Life Time

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