Shareholders of Planet Fitness would probably like to forget the past six months even happened. The stock dropped 23.7% and now trades at $75.29. 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? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Planet Fitness Will Underperform?
Despite the more favorable entry price, we're cautious about Planet Fitness. Here are three reasons we avoid PLNT and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Investors interested in Consumer Discretionary - Leisure Facilities companies should track same-store sales in addition to reported revenue. 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 5.9% 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 16.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Planet Fitness’s ROIC averaged 3.2 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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 21.7× forward P/E (or $75.29 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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