TheChek News Flow

Merlin Entertainments owns some of the most exciting attractions in the world, including the London Eye and Madame Tussauds, but its stock has been less than thrilling.

Shares of the British theme-park operator, which also runs Legoland, have gained 23% since going public in October 2013. Over the same period, the world’s biggest theme-park operator, Walt Disney (ticker: DIS), has had a gain of nearly 106%.

An activist investor contends that Merlin Entertainments (MERL.UK) should go private, saying that the “share price does not reflect the underlying value of the company and may not in the foreseeable future.”

Merlin’s visitor traffic was hurt after a horrific roller-coaster crash in 2015 and terrorist attacks in London in 2017. Yet analysts see business bouncing back after Merlin invested in two new Legoland parks. One is due to open in New York state and the other in South Korea. Some analysts see annual earnings rising to £308.6 million (or USD$390.93) by 2021 from £285 million in 2018.

The company started life as Vardon Attractions more than 25 years ago, running bingo halls and the London Dungeon. It renamed itself Merlin in 1999 and it was owned by various private-equity firms before going public.

Merlin is now the world’s second largest visitor attraction operator, behind Disney, with more than 120 attractions, 18 hotels, and six vacation villages in 25 countries. Merlin employs 28,000 workers and has a market value of nearly £4 billion.

The company is split into three divisions: Midway, its indoor attractions business that includes Sea Life and Madame Tussauds, its Legoland Parks division, and its Resort Theme Parks arm, based around roller-coaster attractions offering accommodations, rides, and shows.

Tim Barrett, an analyst with the brokerage firm Numis, wrote in June that “the most compelling part of the group’s investment case is its ability to reinvest in Legoland.” He rates the stock a Buy, with a target price of 454 pence.

The Midway business is trading 6% below peak profitability as a result of weak London performance in 2018, and Resort Theme parks is 9% below because of the roller-coaster accident, Barrett said.

But he thinks both can quickly recover: “Two of the three divisions are below peak profitability, with ongoing recovery potential in our view.”

The data backs this up—tourism to the U.K. is up 13% year to date.In a statement, the chief executive of Merlin, Nick Varney, said: “Our continued investment, new market opportunities, and our evolving position...give us the confidence that we are well placed to deliver long term growth and returns.”

Last month, the U.S. activist investor ValueAct Capital wrote that Merlin shares should be trading around 450 pence, which would represent a gain of roughly 16% from Thursday’s closing price of 389.30 pence.

Merlin, ValueAct said, should be taken private “given the challenge for public market investors to appropriately value Merlin’s business.”

In response, the board of Merlin said that it “maintains an active dialogue with all its shareholders” and that it “had recent discussions with ValueAct Capital, including their perspectives on the options for the company, and intends to continue the constructive dialogue that it has had to date.”

Merlin could be about to conjure up some extra value for investors.

Planet Fitness and Peloton Have Investors Pumped and Rivals Chafed

Until recently, the fitness industry looked as dated as a copy of Buns of Steel on VHS. There were the same old $30-a-month gyms for grunt-and-clank types, and posh facilities with chilled towels and chatty trainers. Home equipment was dull or weird, from stair steppers to Shake Weight.

Sure, CrossFit had a moment. That’s where groups of otherwise normal people are persuaded to pound tractor tires with sledgehammers. It might yet turn out to be an elaborate Sacha Baron Cohen prank. Spin boutiques like Flywheel Sports and SoulCycle caught on. But they’re now chafing from two disruptive forces.

Planet Fitness (ticker: PLNT) pioneered a $10-a-month gym model that turns profits and allows for rapid expansion. The company went public four years ago at $16 a share, and recently traded at $78. And privately held Peloton Interactive sells $2,000 stationary bikes with big video screens for streaming live classes and recorded rides for $39 a month. A financing round last summer valued the company at about $4 billion. It filed this month for a stock offering.

Rivals are reeling. Shares of Nautilus (NLS), which sells Bowflex machines, and Town Sports International Holdings (CLUB), which owns NYSC, BSC, and other big-city gyms, both recently traded at $2 and change. That’s down from $16 and $12 a year ago, respectively. Both companies are caught on the wrong side of powerful trends: “connected fitness” for home equipment and “high value, low cost” for gyms.

Planet Fitness has been called the Amazon of gyms for its low-price threat to the industry. Peloton is sometimes called the Netflix of cycling for its subscription model. Think of me as the General Electric of personal fitness—in need of a turnaround for years now. But even I can see more industry upheaval ahead.

The latest sign: This past week, Best Buy (BBY), which is shopping for ways to remain relevant in retail, said it would begin selling and installing connected-fitness brands. These include Flywheel, which is similar to Peloton (too similar, claims a lawsuit), and Hydrow, a rower with Peloton-like pricing and more than 500 filmed workouts. Don’t forget NordicTrak, whose treadmills, ellipticals, and bikes have gotten big-screen upgrades and subscription services.

Best Buy will try its hand selling post-workout devices, too. Heard of NormaTec recovery systems? Picture $1,300 ski pants with a motor and smartphone app. “The massage pattern mimics the body’s natural recovery process by applying pulsing compression up the limb in waves,” says a video on the manufacturer’s website. Tempting, but I’ll stick with my current recovery system of lounging in my least-grabby pants while not spending $1,300.

Best Buy is priced for low expectations at 12 times earnings. Not Planet Fitness at 50 times. But its potential to take more market share is clear. Its gyms are kept cheap by skipping the pools, classes, and basketball courts. They’re half the size of typical gyms, with a third as many workers. Close attention is paid to cleanliness, and to making slackers feel welcome. Grunting or dropping weights is a no-no; there’s a playful “lunk alarm” to remind violators.

Does that mean the members are doughier than average? “Maybe five years ago, they were,” says Jefferies analyst Randal Konik. “Today, the user base is expanding: old, young, very fit, not fit, well off, budget-conscious.” Konik, who made a well-timed upgrade of the stock from Hold to Buy in February at $58, compares the company’s evolution to that of Marshall’s. Twenty years ago, the clothing discounter’s parking lots were full of Nissan Sentras, he says. “Today, they’re getting the BMW X5 customer, because the well-off recognize the value, too.”

Franchising keeps Planet Fitness’s capital needs low and free cash plentiful. Its nationwide presence is an advantage. A cut of membership fees goes toward national advertising, which creates a virtuous cycle of growth and awareness. This year, spending on marketing could top $200 million, versus about $150 million last year.

Planet Fitness’s goal is to more than double its number of gyms to 4,000. “They’re getting a lot of convenient real estate as retailers shut down,” says Brennan Matthews, an analyst at Berenberg Capital Markets. A rising gym count adds value to the company’s Black Card memberships, which cost $23 a month and allow entrance to any location. More than half of members have upgraded. Overall earnings per share could double in three years. Estimates have been rising.

Peloton enjoys a network effect from the span of its spandexed community. It integrates with Facebook, and riders can meet up with friends, earn badges, and climb leader boards. If the company succeeds in fending off rivals, those Netflix comparisons might turn to Apple ones, as users pay richly for devices to stick with the ecosystem.

Planet Fitness is testing connected machines. For now, its memberships are cheap enough to be an add-on. “Someone who can’t afford SoulCycle five times a week at $30 a visit might go twice and add Planet Fitness,” says Berenberg’s Matthews.

Not me. I’ve developed a distant offshoot of Tae Bo called yeah no. That’s where I carry gym clothes to work but don’t use them. I get busy, and sometimes lazy. Plus, locker rooms at workplace gyms come with visual hazards. Let’s just say if hell has a burlesque show, it might be called Editors in Towels.

You won’t see that on a Peloton.