Seeking Alpha Analyst Since 2010
This week, I use AAII’s A+ Stock Grades to give you insights into three health and fitness stocks to help get your portfolio into shape. Whether you get on your bike, go to the gym, attend a virtual workout session or choose a healthier diet plan, health and fitness companies Peloton Interactive Inc. (PTON), Planet Fitness Inc. (PLNT) and WW International Inc. (WW) are there to help you achieve your New Year’s resolutions.
Fitness is an essential component of overall health and wellness. It is usually around this time of the year that people start to think about their health and fitness goals. A new national survey from Kelton Global found that 91% of Americans with a New Year’s resolution for 2021 set one tied to fitness.
It is a new year, and with all the honey baked ham, latkes, eggnog, frosted sugar cookies and Hanukkah gelt consumed over the past few weeks, many people are left feeling a little sluggish and guilty about letting their healthy habits slide. This leads many people to make New Year’s resolutions for healthier and more active habits to lose weight, increase physical strength and/or follow a more successful diet plan.
Like investing, your health is another area of your life that it is important to set goals for. By making health goals and taking steps to reach them, you’re able to achieve a better balance of your diet and exercise. It is important to realize that your health and well-being are the product of a combination of your everyday habits. Your health goals can range from being quick, five-minute habits to exercising for a few hours on a regular basis. There are a lot of things you can do to improve your health, and when you put them all together, they will compound to help you get the most out of life through your daily health habits.
Peloton Interactive, Planet Fitness and WW International (formerly known as Weight Watchers) are health and fitness companies ready to capitalize on our holiday food and beverage overindulgences by providing quality home fitness equipment, virtual workout classes, affordable health club memberships and weight management services to those with health and well-being goals to reach.
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality. Using AAII’s A+ Stock Grades, let’s evaluate how attractive Peloton Interactive, Planet Fitness and WW International are based on their fundamentals.
The following table summarizes the stock grades for Peloton Interactive, the largest interactive fitness platform in the world; Planet Fitness, a leading nationwide health club chain; and WW International, a provider of weight management products and services.
Peloton Interactive is the largest interactive fitness platform in the world, with a community of over 3.6 million members. The company’s mission is to empower people to improve their lives through fitness and to make fitness entertaining, approachable, effective and convenient.
Peloton Interactive’s revenue is generated mainly from the sale of connected fitness products (bikes and treadmills) and associated monthly subscriptions. In December, Peloton agreed to acquire fitness equipment maker Precor in a deal valued at $420 million as the company looks to boost its market share for fitness products.
Peloton is benefiting from a secular shift in consumer behavior amid extended social distancing measures, with increased demand for at-home fitness options. The company went public in September 2019.Peloton has a very strong A+ Growth Grade of A. The Growth Grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow.
Peloton has exhibited extraordinary growth in its latest fiscal quarter and over the past year. Sales increased 232% year over year for the quarter ending September 30, 2020. The company also managed to boost earnings by 213% and operating cash by 509%.The company has been posting impressive quarterly growth with connected fitness subscriptions growing 137% to over 1.33 million, paid digital subscriptions up 382% to 510,000 and total membership to over 3.6 million.
Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
Buying stocks that are going to go up typically means buying stocks that are undervalued in the first place, although momentum investors may argue that point.
With its stock up more than 390% over the last year, Peloton has a Value Grade of F, based on its score of 95, which is considered ultra-expensive. The company’s Value Score ranking is consistent across several traditional valuation metrics, with a score of 90 for the price-to-sales ratio, 89 for the price-to-free-cash-flow ratio and 95 for the price-to-book-value ratio (remember, the lower the score the better for value).The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio and shareholder yield.
Planet Fitness is a health club chain that offers high-quality exercise equipment, personalized training and workout classes starting at a low monthly rate. The company is one of the largest and fastest growing franchisers and operators of fitness centers in the U.S. by the number of members and locations. As of September 30, 2020, it had more than 14.1 million members and over 2,000 stores in the U.S., Canada, Panama, Mexico and Australia.
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Planet Fitness’ Estimate Revisions Grade is D, which is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Planet Fitness has posted earnings surprises of negative 83.3% and negative 85.0% for its last two fiscal quarters, mainly due to disruption caused by the coronavirus pandemic.
In addition, over the last month, the consensus estimate for the fiscal year ending December 31, 2020, has risen 2.4%, while it has decreased 67.3% in the previous three months. These, in turn, rank in the 88th and fourth percentiles, respectively, among all U.S.-listed stocks. Over the last month, there has been one upward revision to the fiscal-2020 estimate and zero downward revisions.
Planet Fitness has a Momentum Grade of C, based on its Momentum Score of 47. This means it ranks in the middle of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters are given a weighting of 20%.
WW International provides weight management products and services worldwide. The company operates in four segments: North America, continental Europe, U.K. and other. It offers a range of nutritional, activity, behavioral and lifestyle tools and approaches. The company also provides various digital subscription products and services for wellness and weight management. It specializes in weight loss plans, point systems to keep users on track and personalized coaching.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher Quality Grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.The Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital, gross profit to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
WW International has a Quality Grade of A, putting it in the top tier among all U.S.-listed stocks.
The company ranks highly in terms of its return on invested capital, ranking in the 89th percentile of all U.S.-listed stocks, and in terms of return on assets, ranking in the 84th percentile.
WW International rates well when it comes to its Z double prime bankruptcy risk score, a composite score of various fundamental factors used to evaluate a company’s overall financial health. The company has a Z score that ranks in the 89th percentile.
WW International has a Value Grade of B, based on its score of 38, which is considered to be in the value range. The company’s Value Score ranking is based on a score of 32 for the price-to-sales ratio, 39 for the price-to-free-cash-flow ratio and 43 for the price-to-earnings ratio (remember, the lower the score the better for value).
Whether Peloton, Planet Fitness or WW International get your portfolio into shape is up to you. While you ponder this question, maybe you should enjoy one more eggnog before starting on your 2021 New Year’s fitness resolution.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.