Planet Fitness Up 40% In 6 Months: Can The Bull Run Continue?

Planet Fitness, Inc. (NYSE:PLNT) is riding high on strategic partnerships, international expansions, robust earnings trend and same-store sales. As a result, the stock has gained 40.1% in the past six months against the industry’s 0.4% decline. However, high debt remains a concern. Let’s delve deeper.

Key Catalysts

Planet Fitness has impressed investors with its earnings beat trend over the past several quarters. In the trailing four quarters, the company’s bottom line surpassed the Zacks Consensus Estimates, the average beat being 8.9%. Further, the consensus mark for the current year has moved 0.6% up over the past 30 days.

In an effort to fortify its presence, Planet Fitness has been focusing on strategic partnerships and international expansions. Recently, it announced a partnership with Kohl’s. Per the terms of the agreement, Planet Fitness can open stores adjacent to select Kohl’s stores. In 2019, Planet Fitness intends to open up to 10 stores, adjacent to select Kohl's retail locations across the country. This apart, the company’s existing franchisees signed agreements to open 1,000 more gyms. Planet Fitness expects almost half of these gyms to be opened in the coming three years.

Furthermore, Planet Fitness is one of the largest and fastest growing franchisors as well as operators of fitness centers in the United States. As of Mar 31, 2019, the company had above 13.6 million members and 1,806 stores in all 50 states. It is also committed to open more 1,000 new stores under prevailing area developments agreements. In 2018, Planet Fitness opened 230 new stores (226 franchise stores and 4 corporate stores). The company has stores in the United States, Puerto Rico, Canada, Dominican Republic, Panama and Mexico.

This Zacks Rank #3 (Hold) company’s solid same-store sales growth is an added positive. During first-quarter 2019, Planet Fitness posted the 41st straight quarter of positive same-store sales. In the first, second, third and fourth quarters of 2018, same-store sales increased 11.1%, 10.2%, 9.7% and 10.1%, respectively. In the first, second, third and fourth quarters of 2017, comps had improved 11.1%, 9%, 9.3% and 11.6%, respectively. Increase in net member and higher average royalty rate have been driving comparable sales higher. Increased Black Card pricing too bodes well.

Concerns

Planet Fitness' valuation looks a bit stretched. Looking at the company’s EV/EBITDA ratio (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is the best multiple for valuing leisure companies as they are highly capital-intensive, investors might not want to pay any premium further. Currently, it has a trailing 12-month EV/EBITDA ratio of 32.74. The stock is relatively overvalued right now compared with its peers as the industry average EV/EBTDA multiple currently stands at 7.48x.

Meanwhile, Planet Fitness’ heavy reliance on debt financing remains a concern. As of Mar 31, 2019, cash and cash equivalent totaled $336 million. Total long-term debt, net of current maturities, increased to $1,158.5 million. The company might fail to finance its upcoming projects due to a higher debt burden. Moreover, any downturn in the macroeconomic and credit market conditions would make it difficult for Planet Fitness to pay or refinance its debt moving ahead.

Key Picks

Better-ranked stocks worth considering in the same space include The Marcus Corporation (NYSE:MCS) , Haymaker Acquisition Corp. (NASDAQ:OSW) and SeaWorld Entertainment, Inc. (NYSE:SEAS) . Marcus sports a Zacks Rank #1 (Strong Buy), whereas Haymaker Acquisition and SeaWorld Entertainment carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Marcus reported better-than-expected earnings in the trailing four quarter, the average being 34.7%.

Haymaker Acquisition has an impressive long-term earnings growth rate of 20%.

SeaWorld Entertainment reported better-than-expected earnings in the trailing four quarter, the average being 35.6%.

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