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About Planet Fitness
First of all, subscription-based businesses are generally difficult and we don’t really like them at all.
Not to be full-on Negative Nancy’s at the start of this stock analysis article, however, it is worth airing our grievances and relative disdain for business models that rely heavily upon customers re-upping periodically, especially in rather competitive sectors and industries such as specialty online retail, as a random yet real example.
Thankfully, while we still view Planet Fitness’ business model as subscription-based, compared to its peers its fees are relatively simple and attractive (i.e., low for its users) and some of its most attractive membership plans are long-term lock-ins that offer members access to its workout facilities, which members have to pay for even if they are hardly going to the gym after undoubtedly fudging on their New Year’s resolution to drop twenty pounds.
Still, while subscription-based models even in this context aren’t by any means our favorite type of business model, it is surely better than others in certain business settings.
Heck, one of the founding partners of MacroHint.com had a membership at Planet Fitness and not only enjoyed it, but consistently used it.
They sought an easy, quick thirty-minute sweat session with just a scan on the way in and a “have a good day” on the way out.
That’s pretty much exactly what they got at their local Planet Fitness.
It served its purpose.
With apparently over 2,000 Planet Fitness gym locations in the United States, not to mention its operations overseas, it is to pretty much no surprise that the company is one of the world’s largest, most established operators in the gym membership space, butting heads against competitors such as LA Fitness, Gold’s Gym, Peloton, Anytime Fitness, 24 Hour Fitness and the slew of other local and regional chains that do everything in their power to nip away at Planet Fitness’ market share and inevitably, its margins.
At the end of the day, Planet Fitness generates the bulk of its revenue through royalty fees from its franchisees (yes, Planet Fitness is in the franchise business) as well as the membership fees it charges.
Do we view the company as being recession resistant or recession proof for that matter?
First and foremost, we unequivocally view a gym membership as being a discretionary expense for most consumers, or in other words, a non-essential expense that, when economic times get tough, the masses will pay their rent and purchase necessities such as food, drink and toiletries before they even get close to thinking about prioritizing a gym membership that they may or may not be able to consistently use.
Therefore, Planet Fitness doesn’t appear to naturally have a nearly as recessionary resistant business model as one might initially assume.
Now that some background regarding Planet Fitness, its business model and our general thoughts as to whether or not this company (or its stock for that matter) are resistant to widespread recessionary pressures, let’s get into the company’s core financials and try to figure out whether or not its stock is worth considering as an investment for the long run.
Planet Fitness’ stock financials
With a current market capitalization of $6.4 billion, a share price of $74.47, a price-to-earnings (P/E) ratio of 63.51 and no currently distributed annual dividend being issued to its shareholder base, purchasing shares in the company’s stock at this current juncture appears to be a bit pricey relative to what they are actually worth, given that they maintain a P/E well above 20, which in itself is generally accepted to be the fair value benchmark.
Anything higher than 20 typically indicates that a stock is trading well above what it’s actually currently worth and evidently, 65.29 is a long way away from 20.
Even though this is certainly a negative in terms of considering purchasing shares in the company at this current moment in time at a discount or even simply at a fair price, let’s move on and see if we’re missing out on any hidden value that could make up for the sizable premium one would pay if they invested in the company’s stock today.
According to the company’s balance sheet, Planet Fitness’ executive team is in charge of around $2.9 billion in total assets as well as just north of $3 billion in terms of total liabilities.
This sort of slightly total liability-heavy balance sheet structure was actually not surprising to us at all, as this company is still growing a bit (however, not fast enough to justify paying a considerable premium for shares in the company at the time of this writing) and with growth usually comes added expenses.
Plus, the line of business that Planet Fitness is in inherently requires a lot of equipment and other fixed and variable costs that must be tended to and reevaluated on a daily basis as well as paid down over time.
Therefore, we’re not really all too worried with the company being heavier on the total liabilities side of things given the cost-intensive nature of the gym operation and franchising business mixed with the fact that the company has seemingly done a decent job at keeping its total liabilities tamed to levels near that of its total assets.
As it pertains to the company’s income statement, Planet Fitness’ total revenue over the past five years has experienced its fair share of fluctuations, sitting at $573 million in 2018, rising to $689 million the following year, bearing its worst recent year, 2020, which makes sense, falling to $407 million, however, subsequently jumping to higher levels in 2021 and notably in 2022, where the company reported total annual revenue of $937 million.
It is a bit difficult to say whether or not this trend towards Planet Fitness surpassing $1 billion in total annual revenue will continue, however, we’re certainly encouraged by the strong rebound the company endured during this time period.
We primarily see this as a result of people becoming a bit more health conscious while also simply wanting to get out more following what so far has been the worst of COVID-19.
Although this was the case, it is still our opinion that this company is to an alarmingly large extent, like other stocks we have analyzed in recent history, quite vulnerable to COVID-19 and other public health-related emergencies and crises alike.
However, from a numbers only perspective, this rebound in total annual revenue following 2020 was strong but we wouldn’t count on it growing at a similar exponential rate moving forward.
When it comes to the company’s cash flow statement, it is quite similar pattern-wise to its income statement, as both the company’s net income and total cash from operations have lightly fluctuated in the last handful of years and again, 2020 was the worst recent year for the company in terms of total revenue as well as net income generation and producing positive total cash from operations.
As a sort of reference, the company’s net income in 2019 was $135 million and in 2020 it plummeted to -$15 million, however, it did bounce back to positive territory the following year to $46 million.
This, to a certain extent, quantifies Planet Fitness’ vulnerability to COVID-19 and shutdowns thereof.
Planet Fitness’ stock fundamentals
With great power comes great responsibility and with a strong market presence usually comes the ability to churn out a stronger trailing twelve month (TTM) net profit margin than that of the industry as a whole and its average.
At least, that’s thankfully the case with Planet Fitness.
Specifically, according to TD Ameritrade’s platform, the company’s TTM net profit margin stands at 11.79% to the industry’s average of 4.41%, which we would care to say is a notable difference, of course, favoring Planet Fitness.
Additionally, according to TD Ameritrade’s platform, both the company’s TTM returns on assets and investment lag the industry’s respective averages by considerable amounts.
For example, the company’s TTM return on assets sit at 4.54% compared to the industry’s average of 7.97%.
Its TTM returns on investment sing a similar note.
Scale is likely to blame for this, at least to a degree, as the company has substantially more operations than many of its competitors across the board, making it a bit more difficult for it to produce higher TTM returns on assets and investment(s).
Over time, we hope to see, slowly but surely, Planet Fitness’ core TTM returns on assets and investment rise and inch meaningfully closer to the industry’s averages.
Should you buy Planet Fitness stock?
Planet Fitness doesn’t have a bad subscription-based business model, all things considered.
However, the fact that there are essentially no workarounds in terms of COVID-19 and not letting its impacts have substantial negative effects on its annual revenues and margins overall, added with the fact that consumers as a whole are far less likely to put their essential goods and services in front of a gym membership, Planet Fitness is in a particularly tough business with not a lot of room for error.
Yes, on a numbers basis the company has a comparably strong TTM net profit margin, however, its balance sheet isn’t best equipped (from our perspective) to optimally trudge through the public health emergencies that will likely emerge in the coming years and its present price-to-earnings ratio implies that its stock is trading well above fair value.
It’s just not growing fast enough to justify paying a massive premium for shares in its stock.
Aggregating all of this data and information, we give the company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.