By:
Nathan Zirpolo, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
• Planet Fitness, Inc. (NYSE:PLNT) is a franchisor and operator of
fitness centers across the United States. The company has three distinct
segments: Franchise, Equipment and Corporate-Owned Stores. Planet Fitness is one of the portfolios most
successful stocks, having increased 116.94% since being purchased on September
20th, 2017.
• The company has hit a
new 52 week high three different times in the last three months.
• Net profit margin has
averaged 14.4% over the last three years, over double the sector average of 6%.
• Management intends to
market towards the 80% of the population over the age of 14 who are not gym
members by promoting a community atmosphere. The company has 12.2 million
members as of September 30th, 2018.
• As of September 30,
2018, management intends to open more than 1,000 new stores.
Key
points:
Planet fitness continues to produce solid quarters
with exceptional growth, however the strong estimates are catching up to them.
The company has a bullish outlook in the short term however there is a common
understanding that the momentous stock growth will soon end. Short term growth
can be supported by their current ROA of 5.1%, higher than both the sector and
market average.
Short term growth can
also be supported by the company’s proactive approach to the New Year. In 2019,
the company sponsored the iconic New Year’s Eve celebration in Times Square, a
television event viewed by more people than the Super Bowl. During the event, the
company promoted a sale decreasing their monthly price of membership to $10 a
month if purchased between the first and fiftieth of January. The willingness
to spend money on advertisement can aid short term growth. Management
understands that they need to continue to be a market leader in order to expand
their market segment.
Planet Fitness believes
that the large size of the gen-Z generation will benefit the company. When
looking at the competitors, 70% of their overall growth was driven by member
growth, with the other 30% driven by growth rates. By increasing advertisement
and relating to the young gen-Z generation, the company believes that they can continue
to increase their market share.
Even with a bullish
outlook on the short term, their fundamental metrics indicated bearish long
term trends. The company has a P.E of 77.7, far above the sector average of
19.7 and market average of 18.2. P/S could also be labeled as overvalued. The
P/S of 5.56 is almost four times higher than the market average of 2.6.
What
has the stock done lately?
Despite the turbulent
fourth quarter of 2018, the stock is up almost 16% in the last month, and up
almost 22% over the last three months. As of December 28th, 2018, PLNT
announced that they have partnered with actor and comedian J.B. Smoove to
promote the company being the largest and fastest growing franchisors of
fitness centers through the first quarter of 2019.
Past
Year Performance:
PLNT has increased 74.35% in value over
the past year, but I believe the stock still has a little more growth left.
Despite the high P/E and P/S, their net profit margin suggests short term
margin safety. Furthermore, their ROA is far above market average.
Source:
FactSet
My
Takeaway:
Planet fitness Inc.
benefits from the ability to grow their market share as well as the ease to
franchise and open stores. Due to this, the company has seen the stock price
rise exponentially over the last year. Management’s proactive approach to
attract new customers is good sign for future success, however I believe
specific fundamental metrics (P/E and P/S) are overvalued. Due to this, I
recommend the program holds this company, while also keeping a close eye for a
future correction.
Source:
FactSet
