Tax Reform: Buy Planet Fitness (PLNT)

Planet Fitness Inc (NYSE:PLNT) is a large and rapidly-growing franchisor and operator of fitness centers in the U.S with over 7 million members. The company’s mission is to provide a high quality fitness environment that is both non-intimidating and welcoming – meaning anyone can join. Planet Fitness’ locations are typically 20,000 square feet and consist of a large selection of mid-quality (company branded) cardio, circuit-, and weight-training equipment coupled with staffed trainers that offer unlimited free small group instruction.

Planet Fitness charges $10/per month for a standard membership and primarily targets less-frequent gym-goers that are intimidating by the traditional gym experience. Because of this, Planet Fitness boasts the largest membership base of non-active users (people who infrequently or never use the gym) among all the gym chains in the U.S.

With the company’s broad appeal, its unique positioning has given it an addressable market that is significantly larger than traditional gym chains. Planet Fitness’ total addressable market is approximately 255 million people, representing the U.S. population over 14 years of age.

From a thesis standpoint, as the U.S. economy continues to recover and wages rise (after years of stagnant wage growth) in 2018, an increase in per capita disposable income will likely lead to an increase on health and fitness related expenditures. Planet Fitness also stands to be a key beneficiary of U.S. tax reform.

According to a recent Merrill Lynch research report, “a reduction in the corporate tax rate to about 20 percent would result in an incremental 14 percent boost to athletic retailers’ earnings per share (EPS) in the year the tax cut kicks in.” While the corporate tax rate in 2018 will be 21 percent, athletic retailers should still see a +12 percent boost in EPS. The report also mentioned that Planet Fitness will see the greatest boost to its EPS – 25 percent. In this regard, Planet Fitness is likely overlooked as “a tax beneficiary, given tax screens are likely picking up PLNT’s 25 percent GAAP tax rate rather than the 39.5 percent used to calculate PLNT’s pro forma EPS.”

Beyond the aforementioned growth catalysts, Planet Fitness posted solid Q3 earnings results. Revenue grew by 12.06 percent as compared to the same time last year. Gross margin expanded from 43.75 percent to 49.22 percent and EBITDA margin expanded from 38.80 percent to 43.21 percent. Additionally, the expansion of margins comes from sound operating decisions rather than creative accounting on the balance sheet, as there hasn’t been a significant change in working capital.

Overall, Planet Fitness is a solid company that stands to benefit from tax reform. It’s best to get in before the market prices in the company’s potential boost in EPS.

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