Leadership Changes And New Strength Equipment Will Improve Future Member Satisfaction

Key Takeaways

• Leadership and strategic changes at Planet Fitness suggest improved operational efficiency, which could positively affect future earnings and net margins.
  
• Club growth and equipment upgrades are expected to expand revenue and enhance member satisfaction, contributing to increased membership and better revenue streams.
  
• Significant investment in equipment, fee hikes, and international expansion pose financial risks, with potential impact on revenue, margins, and global market performance.

Catalysts

Planet Fitness, Inc., together with its subsidiaries, franchises and operates fitness centers under the Planet Fitness brand.

• Planet Fitness is undergoing leadership changes and strategic realignments, suggesting potential improvement in operational efficiency and decision-making, which could positively impact future earnings.
  
• An enhanced economic model for franchisees, including reduced build costs and increased Classic Card membership pricing, is expected to improve club-level returns, potentially boosting future net margins.
  
• The company's commitment to accelerating club growth, both domestically and internationally, highlights opportunities for revenue expansion as Planet Fitness aims to open between 160 and 170 new clubs in 2025.
  
• Introduction of new strength equipment and format optimization is anticipated to enhance member experience and satisfaction, which could drive membership growth and improve revenue streams.
  
• The shift to a new operating model aims to increase integration and agility, potentially enhancing net margins through more efficient operations and better responsiveness to market and member needs.

Planet Fitness Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Planet Fitness's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.6% today to 17.0% in 3 years time.
• Analysts expect earnings to reach $266.8 million (and earnings per share of $3.4) by about March 2028, up from $172.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.6x on those 2028 earnings, down from 47.7x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 3.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Planet Fitness Future Earnings Per Share Growth

Risks

• The shift to a more strength-focused equipment mix in clubs could require significant initial investment and might strain financial resources, potentially impacting net margins if not met with a proportional increase in revenue.
  
• The increase in membership fees, including the Classic Card price hike, could lead to increased churn if not well-received by members or if competitors offer lower-priced alternatives, possibly affecting revenue and earnings growth.
  
• Expansion into international markets like Spain requires upfront capital investment and bears the risk of slow returns or underperformance, which could impact overall financial stability and earnings.
  
• The reliance on franchisees to adopt new business models and maintain growth commitments presents execution risk, and any delays or resistance could hinder new club openings and revenue projections.
  
• Increasing marketing spend and investment in strategic priorities may not yield immediate returns, leading to compressed profit margins if the increase in member engagement and revenue does not offset the higher expenses.

Valuation

• The analysts have a consensus price target of $107.538 for Planet Fitness based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $150.0, and the most bearish reporting a price target of just $82.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $266.8 million, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $97.31, the analyst price target of $107.54 is 9.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.