As an investor, I love "cash machines" -- strong, profitable businesses with recurring revenue and a rock-solid customer base.

With 45 quarters of consistently high performance, great brand positioning, a strong market position, and subscription-based sales, it's no surprise that Planet Fitness (NYSE:PLNT) is rewarding shareholders with all-time highs. Bonus: The company has solid plans for its continued success. 

Strong brand

Planet Fitness takes up a unique position in the fitness world. The low-cost gym defines itself very successfully by what it is NOT. Planet Fitness is NOT a gym for "lunks," their not-so-affectionate term for the seemingly gym-obsessed. Nope, Planet Fitness is a place for everyday people, and the company focuses its energy on the 80% of Americans who don't have a gym membership (and like pizza, too).  

Planet Fitness staff member in gym

Image source: Planet Fitness.

The company positions itself as the perfect place for Americans to overcome "gymtimidation" and try out a healthier lifestyle in a beginner-friendly environment.

Once they're past the fear factor, it's easy and inexpensive for new customers to try a Planet Fitness membership, only $10 a month. And the company offers a popular and profitable Black Card upsell ($21.99/month) with perks like all-club access, guest privileges, hydromassage, and tanning. Planet Fitness' low-cost subscription memberships deliver steady recurring revenue. Once members are plugged in, they are unlikely to cancel.

While there are other low-cost gyms, there is no doubt that Planet Fitness' unique strategy of reaching out to non-gym members is working. The company is nearing 12 million members and plans to serve even more people as it grows. 

Strong business model

Named one of Forbes magazine's best franchises in America, Planet Fitness thrives alongside a network of franchisee business partners, who run the clubs' day-to-day operations. As franchisor, Planet Fitness primarily generates revenue through membership royalties, fees, and branded equipment sales.

Row of treadmills inside a Planet Fitness location

Image source: Planet Fitness.

The company's large size gives it additional strength and marketing leverage. There are more than 1,500 Planet Fitness locations in North America, and the company estimates it could expand to as many as 4,000 stores, with a pipeline of 1,000 new locations already in the works. As America's retail and mall real estate reinvents itself, Planet Fitness is rapidly opening its fitness centers in former big-box stores, securing attractive locations (at attractive rates) in large and small markets.

Strong performance

Planet Fitness' recipe for success is working. The company has posted 45 quarters of positive results, with no signs of slowing down yet. 

Metric 2015 2016 2017 Q1 2018
Locations 1,124 1,313 1,518 1,565
Members 7.3 million 8.9 million 10.6 million 11.8 million
Revenue $330.5 $378.2 $429.9 $121.3
Net income $18.5 $21.5 $33.1 $19.8

Data source: Planet Fitness. Revenue and net income figures in millions.

In just two years from 2015 to 2017, Planet Fitness has increased revenue 30% and net income 79%. These strong financial results are backed by very healthy membership numbers. Planet Fitness' locations serve approximately 7,500 members each, and the company posted strong same-store sales increases of 10.2% in 2017, and 11% in Q1 2018. 

As for pricing power, Planet Fitness successfully raised its Black Card membership prices $2/month for new sign-ups in October 2017. Nearly 60% of Planet Fitness members choose the more expensive Black Card membership. 

Any weaknesses?

Planet Fitness carries debts of about $708 million, mostly at variable rates.  The company recently announced plans to restructure its debt to $1.225 billion, mostly at fixed rates. Under the new terms, Planet Fitness will have more funding to grow the business and less interest rate risk, but the company must consistently generate enough cash to service its debt. 

You might be wondering whether Planet Fitness has enough of a moat against the competition -- after all, it's not that difficult to rent space, equip and staff a gym and start selling cheap memberships. While there are not high barriers to entry in this space, Planet Fitness' sheer size, brand, and marketing prowess give it more muscle vs. smaller chains and mom-and-pop shops. In addition to organic growth, Planet Fitness is able to selectively grow by acquisition and the company should only become stronger as their purple-and-yellow network expands. 

Planet Fitness memberships are very affordable, but shares don't come cheap. Planet Fitness has a $5 billion market cap and currently trades at a lofty price-earnings ratio of 97, which might scare off some investors. But with beefy business results backing it up, Planet Fitness shares keep hitting all-time highs almost as fast as the company opens new stores.

 

  

Karen Mikolainis has no position in any of the stocks mentioned. The Motley Fool recommends Planet Fitness. The Motley Fool has a disclosure policy.