Dessauer: Crunch Boosts Bally Fitness

07/04/2003 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

In his Investor's World newsletter, global analyst John Dessauer maintains a list of his top ten stocks. For 2003, through mid-year. these stocks were up over 30%, more than double the gain of the S&P 500. Although Bally Total Fitness--a member of the top ten list, has been relatively flat for the year, the advisor remains bullish on the company's prospects. Here's his review.

"Bally Total Fitness (BFT NYSE), now trading just above $8, has previously traded above $24 in 1998, 1999, 2000, 2001, and 2002. Thanks to new management, lower long-term interest rates and the coming acceleration in economic growth, I expect Bally to trade above $24 again—if not in 2003, then next year. New management is making real changes. For example, there is a new marketing campaign for customers to pay monthly instead of signing long-term contracts. I applaud this move. Fitness centers provide a service that should be fee-based. Sales will rise as people realize they don’t have to sign a long-term contract.

"The keys to Bally’s future are the economy and the receivables that are still on the balance sheet. Lower long-term rates will make it easier for Bally to find a buyer for those receivables. Finance companies are looking for higher yields, and these receivables are in that category. Don’t wait for the news to buy, because when the receivables are sold, the stock is likely to rise sharply and quickly.

"Earnings estimates for this year are $1.30 and subject to upward revision as economic growth increases. In 1998, Bally earned $2.43 a share. That was before the acquisition of Crunch Fitness. The earnings potential is greater today. If the new business plan is successful, earnings per share will rise above $3. That may take 18 to 24 months, but faster economic growth means that earnings for this year and next will be above the current very low expectations. Bally will benefit from a better economy and the stock still has lots of upside room. Bally Total Fitness is a buy."

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