Unusual Options Activity: Should Investors Ride the Planet Fitness Wave?

Democrat or Republican, it's been quite a week. I'm Canadian, so the result only affects me indirectly, but nonetheless, there will be ramifications for my country. That happens every election cycle as a new President flexes their economic muscles on its largest trading partner. We’re learned to live with this reality. 

But I digress.

Normally on Friday, I'll try to cover three unusually active options that look good. However, I'm obsessed with sports and leisure-related businesses, so I couldn't help notice Planet Fitness (PLNT) had the highest Vol/OI ratio in Thursday's trading at 86.50. 

The one thing that I've learned over the years about fitness clubs is that there is an ebb and flow to their popularity, both in terms of consumer interest and their stocks. If yesterday's Q3 2024 results are any indication, things are looking good for Planet Fitness.

Should investors ride the wave of excitement it's currently experiencing? I'll consider both its stock and yesterday's unusually active options.

Have an excellent weekend!

How’s the Business?

Planet Fitness revenue in the quarter was $292.2 million, about $7 million higher than the analyst estimate. Meanwhile, its earnings per share were 50 cents, four cents better than the consensus estimate. 

Across the board its margins were higher with a gross margin of 59.9% 200 basis points higher than a year earlier, while its operating margin was 27.8%, 170 basis points higher than a year ago. 

The company’s system-wide same club sales increased 4.3% with system-wide sales of $1.2 billion, up 9% from $1.1 billion in Q3 2023. Both its franchise (2,369) and corporate-owned (268) locations generated healthy revenue growth during the quarter. It opened 12 franchise locations and nine corporate-owned locations in the third quarter, down slightly from the 26 opened a year ago.

The company’s former CEO stepped down in September 2023. In April, it appointed Colleen Keating as the new CEO. She started the job in June. Her background in hotel franchising should help it navigate its relationship with franchisees, which has faced issues in recent years. 

“Colleen’s deep operational knowledge, strategic mindset and understanding of large-scale franchise operations and consumer-facing brands made her stand out among the candidates considered,” said Stephen Spinelli, chairman of the fitness club’s board of directors in the company’s April press release. 

Analysts generally like PLNT stock. Of the 20 that cover it, 16 rate it a Buy, with a $105 target price, about 10% higher than where it’s currently trading. 

As I look at the past five years, I see an EBITDA margin of 45.7% in the 12 months ended Sept. 30, higher than at any other time in this period. Its return on assets is 6.7%, according to S&P Global Market Intelligence, the second-highest percentage in the past five years, trailing 2019, by 290 basis points, so its operations aren’t perfect, but reasonably sound.  

One note of concern, its Altman Z-Score, which indicates the likelihood of bankruptcy proceedings in the next 24 months, is 1.46. Anything under 1.81 is considered in the distressed zone. The Altman Z-Score changes from quarter to quarter based on a company’s financial performance, so it’s possible it will go higher as it continues to generate profitable growth. 

Its net debt is $2.16 billion, or about 22% of its market cap. The good news is that its net debt as a percentage of EBITDA is 38%, the lowest it’s been in the past five years, so I wouldn’t be too concerned about its balance sheet and solvency. 

Overall, its business is in excellent shape. 

The Unusual Options Activty

It had three unusually active options yesterday, including the top one that I referred to in the introduction.

So, if you want to bet on the stock’s continued momentum higher--it’s up 78% from its March 52-week low of $54.35--all three of the unusually active options from yesterday look appealing. 

The Jan. 17/2025 $100 ask price of $2.70 is just 2.9% of Thursday’s closing price of $94.17, and 2.7% of the $100 strike, so it’s a reasonable use of leverage to ride the wave higher. 

Of course, there is a possibility that the stock’s big move has run its course and a correction is in store for investors over the next 71 days. Who cares? I realize $270 isn’t chump change, but relative to its share price, it's a very reasonable outlay.

The only downside: based on its delta of 0.35758, its shares must appreciate by $7.55 (8%) for you to double your money by selling before Jan. 17., which puts the price at $101.72; that’s less than the net price paid of $102.70 to exercise your right to buy 100 shares. I often like to see the price to double your money below the strike price. 

It’s not a dealbreaker. 

Of the other two, I’d be more inclined to go with the Nov. 15 $100 call. Its ask price is less than 0.5% of the closing price. Further, to double your money, its share price must appreciate by $4.22 (4.5%) in the next week.   

Here’s how the option looks in late morning trading.

As you can see, the ask price is five cents higher than yesterday. However, the ITM (in the money) probability is just 15%, so the odds aren’t great that you’ll win on this bet. 

Interestingly, the $85 strike has an ask price of $12, $2 higher than yesterday, but an ITM probability of 95.26%, which means if you really want to own 100 shares of PLNT stock, it’s the way to go. 

As for the Jan. 17/2025 $100 call, its ask price is $3.60, 90 cents higher than yesterday’s close. It has to appreciate $8.08 in the next seven days, an additional 53 cents from yesterday, and an ITM probability of 38.42%.

When you’ve got more than one possibility, I generally would go for the one with the greatest number of days to expiration. In this case, that’s the one in January. 

I say, ride the wave! 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.