Shareholders of Planet Fitness would probably like to forget the past six months even happened. The stock dropped 53.1% and now trades at $51.15. This may have investors wondering how to approach the situation.
Is now the time to buy Planet Fitness, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Planet Fitness Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Planet Fitness. Here are three reasons why there are better opportunities than PLNT, plus one stock we’d rather own.
1. Same-Store Sales Falling Behind Peers
We can better understand Consumer Discretionary - Leisure Facilities companies by analyzing their same-store sales. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Planet Fitness’s underlying demand characteristics.
Over the last two years, Planet Fitness’s same-store sales averaged 5.5% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Planet Fitness’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 19.2% for the last 12 months will decrease to 14.8%.
3. New Investments Aren’t Moving the Needle
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Planet Fitness’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
We see the value of companies helping consumers, but in the case of Planet Fitness, we’re out. Following the recent decline, the stock trades at 15.8× forward P/E (or $51.15 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Planet Fitness
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