Planet Fitness Stock Could Drop 50% as Growth Slows

As the pandemic shut down gatherings final yr, well being golf equipment had been among the many hardest hit. In March 2020, the health club business’s main inventory play,

Planet Fitness,

noticed its shares plunge from $88 to $24. Since then, 17% of U.S. well being golf equipment have gone out of enterprise—and a few forecasts say the toll may rise to 25%, as members completely drop spin courses for exercising at home.

But Planet Fitness (ticker: PLNT) inventory has loved a stunning recovery. From its Covid backside via early April 2021, the inventory rose at twice the acquire of the S&P 500, to $90. Since 2015, when the corporate got here public at $16, Planet Fitness has steadily lifted gross sales and income because it expanded from 1,000 to greater than 2,100 places. None of its franchise or company-owned gyms had been put out of enterprise by the pandemic.

The chain’s inventory is now buying and selling at $80. That represents 45 occasions the 2022 earnings forecast of $1.75 a share, based mostly on analyst projections tallied by FactSet.

That’s too beneficiant, says Andy Matthes, who has bought the inventory brief—that’s, guess it is going to go down—once in a while at his San Francisco analysis agency, Teton Fund Management. Matthes believes gyms will undergo from pandemic fears for a while. And even earlier than the primary Covid-19 circumstances, there have been indicators Planet’s efficiency was peaking. Matthes is once more contemplating shorting the inventory, believing it ought to commerce at 25 occasions earnings, nearer to the market’s a number of. He thinks the enterprise can earn $1.50 a share long run, placing his value goal at $38.

“Millions of members won’t ever return to a health club,” he says. “The pie is shrinking dramatically, and the surviving golf equipment can be preventing for displaced members.”

Bulls guess they may return—and that Planet will see a flood of refugees from closed gyms. Matthes is skeptical. Based on statistics from the International Health, Racquet & Sportsclub Association commerce group, Matthes figures the gyms misplaced greater than eight million members in the course of the pandemic. Planet Fitness added members within the March quarter—however solely 4% got here from closed gyms.

Planet Fitness, with its $7 billion market capitalization, is not any flash within the pan. Chief Executive Chris Rondeau has been with the corporate nearly from its begin in 1992, taking it to 50 states and a number of other overseas international locations. The firm has stored its system easy and worthwhile. High-end gyms like Equinox and Lifetime Fitness have swimming pools, cafes, and month-to-month charges as excessive as $200. Planet gyms have 20,000 sq. toes of apparatus and locker rooms, for $10 a month. “We’re not catering to the match getting fitter,” Rondeau tells Barron’s. “We go after the informal, first-time health club member.”

Over the previous decade, Planet Fitness has grown membership from 2.9 million to an early-2020 peak of 15.5 million. About 60% of members pay up for a $23-a-month Black Card membership, which permits them to make use of therapeutic massage chairs, tanning beds, and different health club places; the chain’s month-to-month charges really common $17. For franchisees, which personal most places, it produces earnings earlier than curiosity, taxes, depreciation and amortization of 40%.

The economics weren’t flabby on the guardian, both. Revenue—from franchise royalties, company-owned shops, and tools gross sales to franchisees—rose from $330 million in 2015 to $689 million in 2019, whereas earnings went from 11 cents a share to $1.41.

Then got here Covid.

The firm’s income thudded 41% in 2020, and earnings fell to 4 cents a share—after adjusting for noncash and one-time prices. Membership declined by two million. The chain added some 800,000 members within the yr via April, a lot of them former members.

Planet Fitness has all the time been powered by health club openings, and the chain expects so as to add 100 new gyms, at most, this yr—in contrast with 200 yearly earlier than Covid. Rondeau says franchisees and their lenders may have a yr earlier than they’re able to return to that tempo. The firm has lengthy maintained there’s room for 4,000 U.S. places—double right now’s depend—and maybe 1,000 overseas.

Still, saturation could loom, even when former clients return. Comparable-store income development regularly decelerated, from pre-2010’s 20% a yr to 9% by 2019. Filings present {that a} new health club used to enroll greater than 1,300 members, on common, earlier than opening. That common fell to 1,000 by 2019. Rondeau says moderation in presales displays the rising familiarity along with his low value level.

A phenomenon that doesn’t hassle Rondeau is the rise of home fitness networks, like

Peloton Interactive’s

(PTON). His gyms goal clients who can’t afford home-exercise tools, even when they’ve room for it. “Home health has been round perpetually,” he says. “You’ll by no means be capable to exchange the expertise, the group, the range, the security of a real bricks-and-mortar facility.”

But even those that share Rondeau’s perception in Planet Fitness’ prospects suppose the inventory could have gotten forward of itself. When the shares fell under $37 final yr, J.P. Morgan analyst John Ivankoe upgraded it from Neutral to Overweight. He shifted again to Neutral in January 2021, once they rose above $79. Cowen’s Oliver Chen additionally downgraded the inventory to Market Perform in March, after years at Outperform.

Investors could need to wait till Planet Fitness inventory turns into pretty much as good a discount as its gyms.

Write to Bill Alpert at [email protected]

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