The 'Ozempic effect' is weighing on gym stocks. But it could turn out to be a boom for the industry

Published Thu, Nov 16 20237:05 AM ESTUpdated Fri, Nov 17 20239:10 AM EST

Will gym stocks be hurt by an "Ozempic effect" similar to the blow that has rocked the medical device and food sector? "We don't yet know," said Simeon Siegel, retail and services analyst at BMO Capital Markets. "People were very quick to immediately assume that this was going to be bad for gyms, and I believe increasingly people are coming around to the second derivative recognition that it's actually a benefit. The gut reaction [that] this is going to bad for gyms appears to be increasingly falling by the wayside." A new class of anti-obesity drugs commonly known as GLP-1 receptor agonists has exploded on the scene. These drugs are more effective than earlier weight loss medications, and have fewer side effects. This has prompted investors to anticipate the ripple effects these drugs will have on both health and consumer habits. A note from Jefferies in September went as far as to posit that airlines could save on jet fuel as the population gets thinner. Stock in Planet Fitness has slipped more than 16% from the start of the year, while Life Time has added roughly 20%. Planet Fitness sunk to a 52-week low in September after the company's board ousted Chris Rondeau as chief executive officer . Its stock has fared better in November, ticking up about 18%, thanks to a third-quarter earnings beat and a rosier-than-expected revenue forecast. Life Time stock has risen more than 22% so far in November, regaining some ground from an October sell-off spurred by higher operating costs tied to running its fitness centers. CEO Bahram Akradi said on the company's earnings call in October that Life Time could increase membership prices at 20% to 25% of its clubs in the next six to 12 months. In research notes, analysts that cover Planet Fitness have lauded the rise of GLP-1 drugs as a material benefit to the gym's future, with both Evercore ISI and Bank of America raising their outlook on the stock in October and November. PLNT YTD mountain Planet Fitness stock. "We're throwing PLNT's hat in the ring as one of the best consumer plays on GLP-1, and one that still has significant juice in the stock," Evercore ISI analyst Warren Cheng wrote in mid-October when he named the gym operator a top pick and raised its target price to $100 per share, which equates to more than 53% upside from Tuesday's $65.16 close. "Looking across our softlines universe, we think Health & Wellness will likely be one of the top ways that GLP-1's will impact Consumer Softlines, and our math suggests PLNT has the most EPS upside in our coverage," Cheng said. His price target is the highest on Wall Street, but nearly three-fourths of the analysts who cover the stock rate it a buy. The average price target is $72, or about 10% higher than its current level. At Life Time, anti-obesity medication is being incorporated into the weight loss programs it offers to members. LifeTime President and Chief Operating Officer Jeff Zwiefel told CNBC in October that the company would pilot a program that would be overseen by in-house physicians, physician assistants and nurse practitioners, alongside a member's primary care doctor. Members could also work with the gym's trainers and nutritionists to hit their weight loss goals. LTH YTD mountain LifeTime Holdings stock. For those who think the medications will be a silver bullet and allow people to shed pounds without breaking a sweat, gyms could suffer. But another view suggests that the drugs are merely a tool that helps people reach their weight loss goals. Drugs like Novo Nordisk's Ozempic and Wegovy mimic stomach hormones like GLP-1 to suppress the appetite and send signals to the brain that curb cravings. That makes it easier to make dietary changes. One downside of the treatments, however, is that the underlying weight loss isn't permanent. Once people stop taking the drug, they can regain what they lost if they don't change their eating and exercise habits. Patients taking the drug long term also lose muscle mass along with fat. Countering these effects would come with the suggestion of weight training and regular exercise, which is one factor supporting Bank of America analyst Alexander Perry's bullish stance on Planet Fitness stock as well as the broader fitness industry. "[There are] early signs of benefits to fitness industry from increased usage of GLP-1 drugs for weight loss, which we believe are often being supplemented with exercise programs," Perry said in a Nov. 7 note. The analyst reiterated a buy rating on Planet Fitness stock with a $75 per share price target, or about 15% upside. As an example, Perry cited a conversation with Curtis Harman, CEO of privately held Harman Fitness, who said trainers are reporting more customers are seeking personalized programs with a specific focus on resistance training to coincide with GLP-1 treatment. It's still early days, so questions linger, making it tough to assess how anti-obesity medications will influence gym stocks, according to Piper Sandler senior research analyst Korinne Wolfmeyer. "From a stock perspective, unfortunately this category is getting looped into the group of sectors that could get hurt by GLP-1s," Wolfmeyer said. "Everyone is looking for what are things consumers can cut out if they had an easy way to lose weight via these drugs."