Planet Fitness: A Stock Worth Putting On Your Watch List (PLNT)

Overview

Planet Fitness, Inc. (NYSE:PLNT) is a fitness center brand as the name suggests. It makes money by charging membership fees that start as low as $10 per month for the standard membership. Moreover, the company is a franchisor and generates a significant portion of its revenue in royalty fees. The franchise business seems to be really fueling growth of this company as some agreements have been made for the franchisees of Planet Fitness to open over 1,000 additional stores as of December 31, 2021.

Impressive Growth Story

Founded in 1992, Planet Fitness went public in 2015 at $16 a share. The company has outperformed both the S&P 500 (SP500) and NASDAQ Composite since then.

There has been a compound annual growth rate (“CAGR”) of 10.4% in fitness centers since January 1, 2018. When looking at absolute numbers, there were 2,254 stores as the year ended in 2021 which is a substantial increase from the 1,518 stores for the year ended December 31, 2017. Additionally, the members growth has kept a similar CAGR percentage (~9.4%) since January 1, 2018.

Planet Fitness’s latest earnings report was very upbeat, with adjusted earnings of 42 cents a share on revenue of $244.4 million, up from earnings of 25 cents a share on sales of $154.3 million a year ago. While appreciating a great deal since then, the stock is still down significantly year-to-date. Membership hit a record high of 16.6 million members as the quarter came to a close. The non-intimidating environment that Planet Fitness proposes to a large segment of the population seems to be working wonders.

There is however one issue that we are having with PLNT. It does not currently pay a dividend so income investors will have a hard time rallying behind this stock. There was just one dividend payment back in late 2016 in the company’s history. We are always cautious when it comes to investing in stocks that don’t pay dividends as future profitability may be shaky.

We now explore PLNT’s financials and see whether it’s a stock worth owning.

Financials

Since Planet Fitness has been in business for 30 years and publicly traded for the last 7, it’s practical to look into its financial performance year-by-year.

Starting with revenues, we see mixed results over the last five years. The encouraging sign from the perspective of a Planet Fitness investor is that revenues have skyrocketed on a trailing twelve months basis.

Like most stocks, PLNT experienced headwinds during the 2020 pandemic year and had shown to be not too resilient as there was negative revenue growth. 2021 saw Planet Fitness return to positive YoY growth, with revenues getting back to the pre-pandemic level. The trailing twelve-month (“TTM”) metric shows sustained momentum on revenue growth. Furthermore, gross profit showed similar growth with the 2020 dip being an outlier. The company does benefit from scale advantage that gives it extended purchasing power. Therefore costs are kept down.

Planet Fitness’s net income numbers have been rather up and down over the last five years. The volatility can be a concern, but the last couple of years has seen a return to growth – undoubtedly a positive sign.

A nice takeaway is that Planet Fitness has had positive cash from operations throughout this entire time as well:

To navigate the entire operating picture, we can look at this gym stock’s free cash flow (“FCF”), which also looks healthy. Fiscal year 2021 saw the company generate record a relatively high level of free cash flow, posting triple digit FCF:

The TTM figure is an increase as well. In January, the company announced that it would borrow to finance a big expansion. The budget gym company is bullish on its growth and was looking to acquire over a 100 workout centers. This is considered quite a big bet in the trading history of the company at it comes in anticipation of more customers coming to its gyms as the pandemic eases. The gym chain operator had prepared a US$ 975 million securitization as it refinanced older debt and paved the way to fund the buyout of a big franchisee. Analysts opine that this debt is sustainable and we believe the company’s ongoing $100M+ free cash flow will help in keeping the balance sheet robust.

Another encouraging sign for investors in this space is that Planet Fitness has authorized an impressive US$500 million share repurchase program, and its float stands at 4.02%. It has not been clarified whether this share buyback will continue, but this shows the strategic thinking of the company’s top brass and their belief in their offering.

We must say that the financial picture of PLNT is fairly stable and no real downsides to speak of.

Conclusion

Being a budget gym company that focuses on the experience and environment while working out, Planet Fitness is appealing to the increasingly health conscious populace that we have nowadays. The economics behind this company look good. It is sustaining healthy growth in revenues (except for the 2020 pandemic blip) while keeping cash flow positive. However, it must be stated that there is some volatility in the figures over the last five years.

We have to commend the $500 million buyback by the management. But what keeps us on the fence is that there is no dividend payment. We have looked into a large universe of stocks and this sort of company has us somewhat excited. However, with the absence of a dividend, we are calling PLNT’s stock a hold. It is worth considering watching the stock closely in the coming months and years.