Editor’s Note: Back on March 7, with investors growing increasingly concerned about the direction of the market, Director of Trading Anthony Summers wrote, “For value-focused investors, market pullbacks and economic turbulence aren’t reasons to fear – they’re opportunities to shop for quality companies at better prices.”
To help readers combat the volatility, he listed four stocks that The Value Meter had identified as undervalued.
Since then, the S&P 500 has gained 3.9%… but Anthony’s four undervalued stocks have risen by an average of 10.4%, with three of them up by double digits.
It’s yet another example of the merits of value investing and employing an objective, data-based approach.
Kudos to Anthony on the great calls!
– James Ogletree, Managing Editor
Planet Fitness (NYSE: PLNT) has built one of the most recognizable brands in American fitness. With its “Judgement Free Zone” motto and bright purple equipment, the company operates over 2,700 gyms across multiple countries, serving more than 20 million members who pay as little as $10 per month.
But here’s the thing about Planet Fitness that makes it different from most gym chains: It doesn’t actually own most of its locations. Instead, it acts as a franchisor, collecting monthly fees from independent owners who run the day-to-day operations. The company also operates some corporate-owned clubs and sells equipment to franchisees.
This franchise-heavy model should be a cash cow. After all, Planet Fitness collects steady royalty payments without the headache of managing thousands of individual locations. However, that’s where things get interesting – and concerning. (More on that in a bit.)
As for the stock, the chart tells a wild story of boom, bust, and recovery.
After crashing to around $45 in 2023, Planet Fitness shares rocketed all the way up to nearly $110 earlier this year. But that rally couldn’t last forever – the stock has since pulled back to around $103, leaving many investors wondering whether they’ve missed the boat or dodged a bullet.
Recent results show a company that’s still growing but facing some headwinds. First quarter revenue jumped 11.5% to $276.7 million, while same-club sales grew a solid 6.1%. The company added about 900,000 new members during the quarter, bringing total membership to 20.6 million.
Those numbers sound pretty good on the surface. Planet Fitness is clearly still attracting customers with its low-cost model, and the brand remains popular among budget-conscious fitness enthusiasts.
But here’s where The Value Meter raises some serious red flags.
Planet Fitness sports an enterprise value-to-net asset value (EV/NAV) ratio of -50.36. Now, negative ratios can be tricky to interpret, but when we compare that with the average of -6.33 for similar companies, it suggests that the market is paying a steep premium for the company’s assets.
The cash flow picture is even more troubling. Planet Fitness has posted negative free cash flow for four straight quarters, with its cash burn averaging -50.95% of its net assets. That’s significantly worse than the -34.39% average for companies with similarly poor cash generation.
Put simply, Planet Fitness is burning through money at an alarming rate while trading at a valuation that assumes everything will work out perfectly.
Why the cash burn? The company has been investing heavily in new club openings, technology upgrades, and marketing campaigns. While these investments might pay off eventually, they’re putting serious pressure on the balance sheet right now.
The franchise model should theoretically protect Planet Fitness from many of the risks that plague traditional gym operators. But when a company with such a capital-light business model struggles to generate positive cash flow, it raises questions about the sustainability of its growth strategy.
For all of Planet Fitness’ brand strength and membership growth, the current valuation appears to be pricing in years of flawless execution while ignoring some very real financial challenges.
Sometimes even the strongest brands can’t flex their way out of poor financial metrics.
The Value Meter rates Planet Fitness as “Extremely Overvalued.”
What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.