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2019-11-11 22:01:15

Planet Fitness (NYSE:PLNT) is a stock we took sizable profits in last year and have been just trading it here and there ever since. As the stock had pulled back, we put a small bet on the name for a rebound. After the company reported earnings last week, the stock rallied on a decent result and news the company is expanding further into Australia. As such, we want to share with you our thoughts on the stock at present. We think it can both be traded short-term and invested in for the long-term. Let us discuss the play we think you can make and the story here longer-term.

Cash cow

We continue to believe that Planet Fitness is a cash cow. But why? Well, look, it offers very low membership rates, and that gives it a competitive edge over independent gyms. This often prevents cancellations, as even when cash flow is tight, these types of low dollar memberships are often the last to go. While Planet Fitness doesn't have global reach (yet), its model is more of a social hangout spot with fitness undertones, rather than a serious gym, and that is why it works. It is cheap, and it is for socialization, while having 'fun' working out. Planet Fitness continues to grow like wildfire. In fact, this is still one of the fastest-growing franchises in the nation. Eventual saturation could be an issue years later, but there is a lot of room for growth still in the United States, and internationally. The stock's value is stretched, but the stock is growing.

A check on valuation relative to growth

As long as the company continues to show positive subscriber growth, double-digit revenue gains, and double-digit earnings growth, the stock will continue to enjoy a premium valuation. Take a look at our valuation analysis here relative to consumer discretionary sector based on the last set of reports:

Source: BAD BEAT Investing senior analyst Tara

At $68 per share, the stock trades at over a 45 times trailing earnings multiple. This is expensive. On most metrics, the stock appears 'overvalued.' However, when we look at some key growth metrics, some of this premium makes a lot more sense:

Source: BAD BEAT Investing Senior Analyst Tara

At first glance, the valuation is sky high. However, many of the key growth metrics are way above average. Although the growth is impressive, it's still a steep valuation, but if the company can deliver on providing continued growth, then this valuation will be grown into. Let us discuss performance of the name and our outlook going forward.

Top line growth

The just-reported Q3 was another success. We were impressed that revenues were above our expectations once again. We saw Q2 revenues coming in up ~20% to $163 to $166 million, based on new store openings and historical trends. We were once again impressed by the numbers relative to our expectations. Revenues increased 22% year over year, continuing a trend of strong growth:

Source: SEC filings, graphics by BAD BEAT Investing

Revenues climbed and were driven by strong membership and same-store sales growth, both of which have been outstanding, and we see this as continuing as we move forward. Up 22%, revenues were a solid $166.8 million, setting a new third quarter record and beating our most bullish estimate by nearly $2 million. This is impressive because we were far more bullish than the Street. The Street saw a consensus figure of $162.3 million get trounced by $4.5 million. The growth metrics are impacted by both same-store sales growth and new gym openings. There continues to be a sizable number of new gyms being opened, leading to total store growth:

Source: SEC filings, graphics by BAD BEAT Investing

These new gyms are certainly driving growth, but we believe store count continues to grow at a very reasonable and manageable pace. There is so much room for growth, especially international growth. The company is incredibly strategic with its new stores, and all new gym openings are carefully selected so as not to cannibalize other shops. A total of 41 new Planet Fitness franchise stores were opened in the quarter bringing the total to 1,899.

On the other side of the equation, same-store sales were strong. We were impressed with system-wide same-store sales jumping 7.9%, contributing meaningfully to sales growth and at the midpoint of the 7.5-8.5% growth we thought we could see:

From what we see, the company is managing growth at existing stores effectively. The high-single digits and sometimes double-digit comp sales growth is a key result. The name is still growing like wildfire. But what about profits?

Earnings generation demonstrates the growth

While sales were up 22%, net income rose 45%. Net income came in at $29.7 million, up from $20.5 million last year. On a more comparable basis, adjusted net income jumped 20% to $33.1 million or $0.36 per share:

Source: SEC filings, graphics by BAD BEAT Investing

Adjusted net income per share met the consensus expectations. Coming into earnings, the stock had given up a sizable chunk of its past gains, so the stock was no longer priced for perfection, but was still priced for solid results. Rising from $0.28 per share last year, we think this was a solid result. So long as growth continues, the stock can climb. We think after the breather the stock took, shares can still move higher. Still, any quarterly weakness could send shares spiraling downward at the present multiples, but when a company delivers ~30% growth plus in earnings per share each year, a sky-high multiple makes sense. We expect performance to continue.

Looking ahead

We still believe in the business model, and the fundamentals remain strong. It is expensive here on a valuation basis, but so are many other growth stocks. Still it is clear that the company is delivering. So long as it continues to deliver the premium multiple will remain. The company has stellar same-store sales growth, marking the 51st consecutive quarter of positive same-store sales growth, which has driven results higher. As a result of what we have seen year to date and the projected opening of at least 250 stores this year for 2019, we still have bullish expectations.

Factoring in the present store count and future openings, we expect another 30-40% hike in store count from the current levels over the next 4-5 years. We expect revenues will grow by nearly this same amount longer term. We see sales rising at least 20% from last year. Much of this is being driven by the immense same-store sales growth. We see same-store sales growth coming in at 8-9%. Thus, our expectations on the top line are for at least $685-690 million for the fiscal year. If we assume a commensurate rate of growth in expenses, we anticipate EPS of at least $1.58. This translates to a 29.5% growth in earnings. Note, we are more bullish than management's guidance for $1.56 in EPS.

Ahead to 2020

In addition to expansion in North America, we believe international expansion is the story for the next decade. International markets represent a very attractive opportunity for the business, and on the earnings call, management shared a development on this front. We learned that the company finalized plans to open its first Planet Fitness stores in Australia.

The initial development agreement secures ownership of the Planet Fitness trademark, and grants of the partner developer rights to convert and remodel several of its existing locations into the Planet Fitness brand and to build a minimum of 35 new locations in a portion of Australia.

This expansion into a new market is incredibly bullish and could spark another wave of growth in EPS for the company in the next decade. This news helped drive a recent rally.

Conclusion

The stock is still expensive but it is a growth stock. The growth path is evident when examining existing store performance as well as new store growth. The company's revenue and earnings growth, as well as the impressive same-store sales justify a premium. Be cautioned that one bad quarter could send shares spiraling lower, but the name continues to deliver. As such, we think traders can enter the name here and scalp a solid gain in the coming weeks barring market turmoil as the stock looks to retake $70. Longer-term investors need to keep an eye on sales and earnings growth to justify the continued premium, but we believe we will see another 30% growth in EPS in 2020.

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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.


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