Peloton Has Problems. Why That’s Good News for Planet Fitness Stock.

Peloton Interactive PTON –4.05%  lost less money, improved its free cash flow, and delivered more than expected connected fitness subscribers in the latest quarter—and its stock was rewarded for it. The big winner, however, might be Planet Fitness PLNT –0.28% .

Peloton (ticker: PTON) stock jumped 8.2% on Thursday despite posting a loss of $1.20 a share, narrower than its loss of $1.25 a share in the year-ago quarter though wider than the 67-cent loss analysts had expected. Sales of $616.5 million came in below forecasts for $637 million. Investors, however, focused on the fact that Peloton still plans to achieve break-even cash flow by the second half of its fiscal 2023.

Things are still far from being fit and fine, however. Peloton said it expects revenue in its holiday quarter to be in the range of $700 million to $725 million, short of the $866 million that analysts had forecast. Given the lower disposable income of consumers, a shift in spending patterns amid an increasingly uncertain economic environment and the move back to gyms, there’s no telling when and if in-home fitness equipment purchases will grow. Peloton also said it saw its member count decline to 6.7 million during its first quarter, from 6.9 in its fourth, reflecting “the rolloff of a Covid-impacted quarter” and a drop in subscribers for the Peloton app.

“This marks a first in member decline for Peloton since its inception, and proves the consumer has grown tired of working out in their basement,” writes Jefferies analyst Randall Konik.https://df51c0c6787520a4be1e1399c6d59da5.safeframe.googlesyndication.com/safeframe/1-0-39/html/container.html

Peloton’s loss is Planet Fitness’s gain. Konik notes that Planet Fitness (PLNT) has a large and growing presence—at the end of June it had 2,324 owned and franchised locations globally and aims to have 4,000 in the U.S. alone—while gym membership demand should continue to improve. Konik notes that Planet Fitness had a record 16.5 million members at the end of last quarter and has a much larger addressable market than Peloton. And the good news could keep coming when planet fitness reports earnings on November 8. “On the quarter, we believe PLNT will show higher-than-expected member growth,” Konick writes.

• Stocks Dropped Because the Fed Will Keep Raising Rates Until Inflation Breaks—or the Market Does

Not everything is perfect. Planet Fitness is feeling the impact of China’s shutdown as it deals with an HVAC supply shortage. It also has total debt of $2 billion, as of June, an amount that could raise eyebrows. Still, it’s all at a fixed rate debt at an aggregate rate of roughly 4%, with only $51 million of principal due before 2025, explains Raymond James’ analyst Joseph Altobello. What’s more, Planet Fitness’s low $10 a-month model is enough of a bargain that membership could hold up even during a recession.

Altobello lifted his rating to Buy in September and set a price target of $70, up 9% from Thursday’s close of $64.08. Konik is even more optimistic—he reiterated his Buy rating and $115 price target on Planet Fitness after Peloton’s results, suggesting the stock could gain 80%.