Planet Fitness stock could drop 50% as growth slows

As the pandemic ended gatherings last year, health clubs have been among the hardest hit. As of March 2020, the gym industry’s main stock play,


Planet Fitness
,

saw its shares plunge from $ 88 to $ 24. Since then, 17% of U.S. gyms have gone bankrupt – and some forecasts say the toll could rise to 25% as members permanently give up spin classes to exercise at home.

But Planet Fitness stock (ticker: PLNT) has seen an astonishing recovery. From its Covid low through early April 2021, the stock has risen twice the gain of the S&P 500, to $ 90. Since 2015, when the company went public at $ 16, Planet Fitness has steadily increased its sales and profits from 1,000 to over 2,100 locations. None of its franchised or company-owned gyms have been bankrupted by the pandemic.

The chain’s action is now trading at $ 80. This is 45 times the 2022 earnings forecast of $ 1.75 per share, based on analyst projections calculated by FactSet.

It’s too generous, says Andy Matthes, who has intermittently sold the stock short, that is, it’s going to drop, at his San Francisco research firm, Teton Fund Management. Matthes believes gyms will suffer from fears of a pandemic for some time. And even before Covid-19 hit, there were signs that Planet’s performance was peaking. Matthes is considering selling the stock short again, believing it should trade at 25 times earnings, closer to the market multiple. He thinks the company can earn $ 1.50 per share over the long term, bringing its price target to $ 38.

“Millions of members will never go back to a gym,” he says. “The cake is shrinking dramatically, the surviving clubs will fight for the displaced members. ”

The Bulls are betting they’ll come back and Planet will see a flood of refugees from closed gyms. Matthes is skeptical. Based on statistics from the International Health, Racquet & Sportsclub Association trade group, it estimates that gyms have lost more than eight million members during the pandemic. Planet added members in the March quarter, but only 4% came from closed gyms.

Planet Fitness, with its market cap of $ 7 billion, is not a one-year wonder. Managing Director Chris Rondeau has been with the company almost since its inception in 1992, bringing it to 50 states and several foreign countries. The company has kept its simple and profitable formula. High-end gyms like Equinox and Lifetime Fitness have pools, cafes, and monthly fees of up to $ 200. Planet Gyms have 20,000 square feet of equipment and locker rooms, for $ 10 per month. “We don’t take care of the fit to get fitter,” Rondeau said. Barron. “We’re going after the casual member of the gym for the first time.”

Over the past decade, Planet Fitness has grown from 2.9 million members to a high of 15.5 million at the start of 2020. About 60% of members pay for a black card subscription of $ 23 per month, which allows them to use massage chairs, tanning beds and other gym locations; the monthly chain charges averaged $ 17. For franchisees, who own most of the locations, it produces 40% profit before interest, taxes, depreciation and amortization.

The parents’ economy has not been soft either. Revenue – from franchise royalties, company-owned stores, and equipment sales to franchisees – grew from $ 330 million in 2015 to $ 689 million in 2019, while profits rose from $ 11 million. cents per share at $ 1.41.

Then came the Covid.

Planet’s revenue reached 41% in 2020 and profits fell to four cents per share, after adjusting for non-cash and one-time charges. The number of members has decreased by two million. The channel added some 800,000 members this year through April, many of them former members.

Planet’s growth has always been fueled by gym openings, and the chain plans to add 100 new gyms, at most, this year, up from 200 per year before Covid. Rondeau says franchisees and their lenders may take a year to get ready to return to this pace. The company has long maintained that there is room for 4,000 locations in the United States, double the current number, and possibly 1,000 overseas.

However, saturation can be seen, even if old customers return. Comparable store sales growth gradually slowed, from 20% per year before 2010 to 9% in 2019. Records show that a new gym had more than 1,300 members on average before its opening date. opening. That average fell to 1,000 in 2019. Rondeau says the moderation of presales reflects growing familiarity with its low price.

One phenomenon that Rondeau doesn’t mind is the rise of home fitness networks, such as


Interactive Platoon
‘s

(PTON). Its gyms target customers who cannot afford to purchase home exercise equipment, even if they have the space. “Home fitness has been around forever,” he says. “You can never replace the experience, the community, the variety, the safety of a real brick and mortar installation. “

But even those who share Rondeau’s belief in Planet Fitness’s outlook think the action may have gotten a head start. When stocks fell below $ 37 last year, JP Morgan analyst John Ivankoe lifted them from Neutral to Overweight. It returned to neutral in January 2021, when they crossed $ 79. Cowen’s Oliver Chen also lowered the action to Market Perform in March, after years at Outperform.

Investors may want to wait until the shares of Planet Fitness become as good a deal as its gyms.

Write to Bill Alpert at [email protected]

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