Weekly Equity Idea Highlight - 2018 03 14
PLNT has been focused on an asset-light franchising model that is likely to drive substantial UAFRS-based (Uniform) ROA expansion over the coming years, but based on the company's low valuations, the market does not appear to recognize this. PLNT trades at a significant discount to any other companies in the consumer space that are currently undergoing a similar franchise growth strategy, pointing to the market's pessimism.While the market is pessimistic, expecting Uniform ROA to fall dramatically, below levels since 2013, PLNT has clearly laid out a strategy to double the business in the next five years, which should likely lead to at 50%-100% increase in ROA', depending on how much the company also grows assets. Considering the company's asset light nature, and well laid out strategy, the market's lack of confidence in the business model points to reason for equity upside.
Part of the reason for the market's pessimism appears to be related to the company's sizable debt maturities. However, Credit Cash Flow Prime analysis highlights that the company should have no issues in handling their debt maturities, which do not come due until 2021, and also has ample capacity to take on more leverage if they desired, or to return capital to shareholders, based on the strong fundamentals of the business.
Incrementally, management have started to show confidence in their earnings calls about their strategy, including their customer engagement, success in raising royalty fees with franchisees, and their investment in technology infrastructure to drive engagement, operational improvements and earnings, pointing to reasons to recognize that management is getting more optimistic about their outlook for their business.
Considering overly pessimistic market expectations, management's operational success and intelligent growth strategy, management's growing confidence about their strategy, overstated credit risk, and the potential for the company to return capital to shareholders, there appears to be equity upside potential for PLNT.
Planet Fitness is a holding company. Through its subsidiries, the company is engaged as a franchisor and operator of fitness centers. The company's stores include co-branded cardio equipment, free weights, strength machines, a workout area, a small retail area and a drink cooler. The company operates and manages its business in three business segments: Franchise, which includes operations related to its franchising business in the U.S., Puerto Rico, Canada, the Dominican Republic and Panama; Corporate-owned stores, which includes operations with respect to all corporate-owned stores throughout the U.S. and Canada; and Equipment, which includes the sale of equipment to franchisee-owned stores in the U.S.
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