The Gym Group [GYM] has had a year of consistently positive earnings, with profits and members up quarter after quarter, yet – like a lot of UK stocks affected by macro headwinds – its share price is down this year.
The gym provider’s share price has shed near 10% from the start of the year to 28 August, and 4.4% since its last financial report on 12 July.
Will its latest report, due on 29 August, produce a more positive reaction in the stock market? Some analysts think so, predicting that the company will announce its highest profits yet.
A look at past earnings
The Gym Group posted impressive half-year results on 12 July, reporting a 26.9% rise in revenue, to £74m, in the first six months up to 30 June. This was up from £58.3m a year prior.
Meanwhile, total membership numbers increased by 10.6% to 796,000. Some 135,000 customers were signed up to the company's premium membership, 'Live It', during this time, which accounts for 16.9% of total membership, up from 11.7% last December. Growth in 'Live It' members led to a 5.6% increase in average revenue per member, per month.
The group said it is on course to open 15-20 standard size gyms in the second half of 2019, as well as its first "small box" gym – which will be around half the size of its regular gyms.
The Gym Group's half-year revenue
What's expected in interim results?
Analysts predict that the company will reveal even higher numbers during its interim results announcement. Peel Hunt analysts expect profit before tax to be 30% higher than the first six months of the year, at £9m.
Traders will pay particular attention to the group's premium membership performance to see if it can continue the revenue-generating growth it has seen in the first of the year. They will also be looking to hear a more fleshed out plan concerning the group's "small box" gyms, which will launch toward the end of the year.
The Gym Group's total membership numbers
What's behind the company's share price decline?
There are signs that The Gym Group is overvalued, which could account for why the share price hasn’t gained alongside strong earnings figures.
The stock’s price-to-earnings ratio is 28.55, according to MorningStar, higher than its consensus forward P/E ratio of 22.22. The predicted pullback may suggest the stock is retreating from its lofty valuation, and a more attractive entry point could be coming into view. However, it does suggest a lack of share price growth in the near-term, in spite of the solid earnings potential already cited.
|PE ratio (TTM)||45.19|
|Quarterly Revenue Growth (YoY)||35.10%|
The Gym Group share price vitals, Yahoo Finance, 28 August 2019
Despite these challenges, analysts are positive on The Gym Group’s outlook over the longer-term.
Analyst Douglas Jack has said that the business is well-positioned to maintain growth in coming years. "We believe the demand/supply dynamics of the low-cost gym market sector support The Gym Group's growth ambitions," he said.
"For example, in the year to March, 65% of gym market membership growth was in low-cost gyms, within which 70% of new gyms were opened by the top two operators."
Jack also predicts that The Gym Group is set to pay off all of its bank debt in four years.
“We believe the demand/supply dynamics of the low-cost gym market sector support The Gym Group's growth ambitions” - Peel Hunt Analyst Douglas Jack
MarketBeat reports that The Gym Group shares command an average recommendation of ‘buy', from six firms that cover the company. Peel Hunt reissued its ‘buy' rating on the stock last week. The average 12-month price target is currently 310p, representing a potential 27% upside from its 27 August price.