Planet Fitness Stock: Drastically Overpriced

Summary

• Planet Fitness is an excellent company, and it appears to have a bright future ahead for itself.
• But this does not mean that Planet Fitness makes for a compelling investment opportunity at this time.
• With PLNT stock is looking drastically overpriced, investors should tread very carefully moving forward.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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Good health is one of the most important things for any person alive. Without it, your quality of living will be drastically lower than if you do have it. There are a number of companies that are dedicated to helping individuals achieve better health. And one of these firms is Planet Fitness (NYSE:PLNT). In the years leading up to the COVID-19 pandemic, Planet Fitness exhibited attractive growth on both its top and bottom lines. 2020 proved to be difficult for the enterprise, but the company has since shown signs of a strong rebound. And with its physical footprint larger than ever, its long-term prospects are undeniably attractive. Having said that, shares of the business look unreasonably expensive at this point in time. I would say that this is true to the extent that shares are probably overvalued by quite a large margin.

Checking out Planet Fitness

According to the management team at Planet Fitness, the market for health clubs in the US is pretty sizable, amounting to about 64.2 million members. Probably the largest player in this space is Planet Fitness, with an estimated 15 million members spread across its entire system. This system includes both company owned and franchised fitness centers nationwide. On average, these are about 20,000 square feet in size and the company starts charging at a low rate of just $10 per month for their standard membership.

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Over the years, Planet Fitness has done well to grow its physical footprint. Back in 2016, for instance, the company's network included 1,313 locations across the US. Only 58 of these were company owned, while the rest were franchised. In all, the company boasted 8.9 million members across these locations at that time. As the chart above illustrates, management was very active in growing the company's physical footprint in the years after 2016. Its peak year was in 2019 when the company added 261 stores to its location, bringing the total store count for the first time to 2,001. Despite the COVID-19 pandemic, the business continued to grow the number of locations in its system. That year, the company ended with 2,124 stores, 103 of which were company owned. Today, the company's 15 million members attend 2,193 stores nationwide. But management believes that its growth has not stopped just yet. At present, it has commitments for more than 1,000 new stores in its pipeline, with the expectation that this year alone it will have added between 110 and 120 locations to its portfolio.

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As the location count grows and as the number of members at its locations, in aggregate, grow, revenue has generally expanded. Between 2016 and 2019, for instance, the company saw its sales climb from $378.24 million to $688.80 million. 2020's all sales drop to $406.67 million as the number of members the company had dropped from 14.4 million to 13.5 million. But that decline was short-lived, with sales in the first nine months of the 2021 fiscal year coming in at $403.38 million. That compares to the $272.85 million generated the same time one year earlier.

Just as revenue has generally risen, the same can be said of profits. Between 2016 and 2019, for instance, the company saw its net income climb from $21.5 million to $117.70 million. But then, in 2020, profits turned to a loss in the amount of $14.99 million. Operating cash flow has followed a similar trajectory, rising from $108.82 million to $204.31 million before dropping to $31.14 million in 2020. The last profitability metric that I looked at was EBITDA. According to the data provided, this metric grew from $150.62 million to $282.18 million. But then, in 2020, it declined to $120.36 million. For the current fiscal year, things have started turning around again. The company went from a loss of $23.68 million in the first nine months of 2020 to a profit of $37.03 million the same time this year. Its operating cash flow went from a negative $2.12 million to a positive $149.49 million. And its EBITDA surged from $69.25 million to $161.45 million.

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For the current fiscal year, management has provided some guidance for us to rely on. For instance, the company thinks sales should come in between $570 million and $580 million. While that represents a nice improvement over the 2020 figures, it does still fall short of the results achieved in 2019. Clearly, the company is still in recovery mode. Adjusted net profits, at the midpoint, should come in somewhere around $67.12 million, while EBITDA is forecasted to total between $210 million and $220 million. Management provided no guidance when it came to operating cash flow, but a simple assessment on my end implies a reading this year of about $155.67 million.

PLNT stock is overpriced

Thanks to all of this data, we can now price the business. But what we find is not all that encouraging. If we use the 2021 estimates, the company is trading at a price to earnings multiple of 118.7. Even if we revert back to 2019 levels, the company would be trading at a multiple of 67.7. The price to operating cashflow approach would yield a multiple of 51.2, up from the 39 if we used the 2019 figures. And the EV to EBITDA multiple should be 42.5, up from the 32.4 if we used the data from 2019. As part of my analysis, I decided to take the all time high membership the company has and forecast financial performance on an ongoing basis from that membership figure using the 2019 fiscal year as a baseline. Doing so would see the company come in slightly cheaper than the other approaches suggest, with a price to earnings multiple of 65, a price to operating cash flow multiple of 37.4, and an EV to EBITDA multiple of 31.1.

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The next thing I did in this analysis was to compare these figures to the five highest rated of the company's peers that I could find on Seeking Alpha's Quant platform. On a price to earnings basis, these companies ranged from a low of 1.5 to a high of 97.2. Even if we use the most generous pricing methodology for the company, only three of the five firms were cheaper than our target. I then did the same thing using the price to operating cash flow approach, resulting in a range of 13.5 to 32. In this case, our prospect was the most expensive of the group. And finally, I did the same thing using the EV to EBITDA approach, ending up with a range of 15.4 to 28.5. In this case, our prospect was the most expensive of the group once again.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
RCI Hospitality Holdings (RICK)	21.6	15.7	15.4
Allied Esports Entertainment (AESE)	1.5	N/A	N/A
Cedar Fair (FUN)	N/A	32.0	27.0
Six Flags Entertainment (SIX)	86.2	13.5	15.8
Vail Resorts (MTN)	97.2	17.7	28.5

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Takeaway

Based on all the data provided, I must say that I am impressed by the track record that Planet Fitness has generated. So long as healthy living is considered and increasingly important factor for consumers to worry over, the opportunities for a company like this should be excellent. Having said that, even strong growth warrants only so much of a premium on a company's share price. And in my opinion, the premium demanded by the market today is a bridge too far.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.