Planet Fitness: A Momentum Play – Planet Fitness (NYSE:PLNT)
The basis of a solid momentum investment play is finding a company that has an innovative approach or product in an industry with prospects of strong demand growth, rapidly growing financial statistics indicative of effective managerial decisions, that is attracting institutions and other market heavyweights to buy larger volumes of the stock. Technical analysis should be employed to determine whether positive price movements are supported by growing coordinated institutional interest so that the stock can be bought at pivotal points to maximize the holding’s internal rate of return. Planet Fitness Inc. (PLNT) is a company that has just come out of a negative bottom line situation into profitability with substantial sales growth and strong financial statistics by providing a unique gym experience to customers at a substantially lower price than competitors. Now the stars seem to aligning for it technically, indicating that its ripe for a torrent of institutional interest to have it pivot upward for a rapid bull run.
Unlike gyms like Equinox which charge high prices and carry expensive and specialized equipment for serious gym-goers, Planet Fitness is committed to being a low cost and low commitment offering for people who aren’t too intense about going to the gym. Their gyms have mostly basic cardio equipment, don’t even stock weights heavier than 75 lbs, and there was uproar on reddit.com when certain gyms removed squat racks on the basis of customer complaints that they”were too intimidating”. Looking at the Planet Fitness Rules and Regulations, it’s clear that they even welcome children into their facilities, who are very unlikely to train seriously, and are committed to making the Planet Fitness gyms a “judgement-free zone” by prohibiting the use of cameras, which indicates that they are not interested in targeting people trying to make serious gains for Instagram. They even have a “lunk alarm” which will actually go off if weight-lifters grunt, or make too much noise when using the scant weight equipment on offer.
One might think that relying on memberships for a gym where you cannot achieve actual fitness results from high-intensity exercise might be terminal and fundamentally foolish, but it’s extremely effective. First of all, it is marketable to a large market of people who have never had gym memberships, which is principally where PLNT’s revenue growth and 22% CAGR in memberships since 2013 have come from. According to the recent 10-K, 40% of PLNT’s members have never had gym memberships before, and 80% of Americans and Canadians are not gym members. Planet Fitness does not have to compete fiercely with companies like Equinox, because their market is people who aren’t really suited for gyms. The low membership fee is a consequence of the market, but it’s mitigated by the second advantage of PLNT’s business model, which is that the less serious clientele demands inexpensive equipment which means lower capital requirements. This means that pitching to franchisers is less difficult, as the branded equipment they have to acquire, although still expensive in absolute terms, is not extremely specialised and heavy, and therefore relatively cheap in start-up costs. The focus on customers who are not interested in the hardcore gym experience also allows Planet Fitness to market a more expensive membership that includes a comprehensive offering interesting to casual gym-goers as seen below.
|Current YoY Quarterly EPS Growth||55%|
|Previous Quarter YoY EPS Growth||64%|
|Current YoY Quarterly Sales Growth||31%|
|Previous Quarter YoY Sales Growth||32%|
|3-Year Avg. EPS Growth||38%|
|Market Cap||$5 Bil|
PLNT is showing strong and persisting momentum in their YoY quarterly EPS growth, more or less in line with the previous quarter, and this growth has been consistently strong indicated by the 3-year EPS growth rate at 38%. Their sales growth in tandem with their EPS growth indicates that the profitability is being driven by sales and not by cost cutting and improved efficiency, which would run quickly into diminishing returns, all the while being remarkably profitable given their low prices compared to other gym subscriptions, with a profit margin at 31.6%. An additional positive is the degree of management ownership at 8.4%, indicating that management interests should be generally aligned with that of shareholders.
However, it should be noted that the 31% growth in current quarterly YoY sales is actually quite overstated due to an accounting change detailed in PLNT’s Q2 10-Q. Adjusting for the accounting change yields a YoY sales growth rate of 21%, which is a significant decline from the previous quarter and might indicate weakening momentum. Despite this, the financial statistics are showing fair momentum, and could very well spur institutional interest should they recognize the novelty and be convinced of the viability of PLNT’s model.
The technicals for PLNT are quite good, and are just waiting for big money to spur a price pivot that should lead to another rally. From a chartist’s perspective, what is visible is the formation of a pennant on the weekly chart after a breakout from the highs of the last portion of an ascending base (from IBD; visible above). The price tightening in the pennant is indicative of a reduction in selling and buying of the stock, also confirmed by the substantial declines in weekly trading volume. This would hopefully mean that the smaller players are the only ones left trading in the markets, and that distribution of the stock is exhausting. The drying up in volume is also visible on a more granular level on the daily chart below.
With enough institutional buying, a buy point would be created as the price beats the pennant’s all time high, breaking through the resistance line formed by weak holders just coming out of the red from having bought at that high. The current institutional sponsorship bodes well for future institutional interest as well, with an overall increase of 2% from last quarter in institutions holding the stock, according to IBD.
The financial statistics, although partly overstated, are showing decent momentum indicating the viability of PLNT’s unique approach to the gym business, and the technicals are showing a good set-up for a surge in institutional interest should it come. Given that it breaks out from the pennant, the stock may very well be worth holding for an intermediate rally, so long as the market doesn’t turn violently right after the breakout with higher market volatility and the greater degree of distribution in equity markets.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PLNT over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.