Thursday, February 7, 2019

A Current AIM Small Cap Equity Holding: Planet Fitness (PLNT, $58.06): “The Marquette Stock Providing Fat Gains” By: Nathan Zirpolo, AIM Student at Marquette University

Planet Fitness (PLNT, $58.06): “The Marquette Stock Providing Fat Gains”
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