Planet Fitness, Inc. (PLNT) in Newington, N.H. is one of the leading franchisors and operators of fitness centers, with more than 2000 stores in 50 states. With nearly all stores now reopened, PLNT’s strong net membership growth has helped its stock climb 30.4% over the past year. In addition, the company has added 700,000 new members since the end of the first quarter, as more individuals appreciate the benefits of staying fit amid the pandemic.

However, with major U.S. cities now imposing full COVID-19 vaccination mandates on customers and employees of gyms, restaurants, and other entertainment venues, shares of the fitness operator have dipped 5.8% over the past five days and 2.5% over the past month. Furthermore, PLNT is currently trading 20.8% below its 52-week price high of $90.34, which it hit on February 25, 2021.

With the seven-day average of daily coronavirus cases surpassing the peak seen last summer, more states are expected to impose new restrictions and announce vaccine mandates. This could cause a further decline in PLNT’s stock price.

Here is what we think could influence PLNT’s performance in the upcoming months:

Fresh Restrictions and Vaccination Mandates Can Derail Growth

Earlier this month, New York City Mayor Bill de Blasio mandated the requirement of COVID-19 vaccination proof from customers and employees of indoor eateries, gyms, and various entertainment venues. Now, San Francisco has followed New York’s lead, and  the order from Mayor London Breed takes effect from August 20. Furthermore,  the order prohibits individuals from submitting negative COVID-19 test results as a substitute for vaccination.

Prompted by a significant spike in coronavirus cases tied to the Delta variant, Los Angeles and other major cities are also considering imposing similar vaccination mandates. As leaders  grow more concerned about the surging infection rate, there’s a potential for more  restrictions to be imposed on outdoor activities. This could negatively impact fitness operator PLNT’s business and mar its growth in the near term.

Stretched Valuation

In terms of non-GAAP forward P/E, PLNT is currently trading at 100.64x, which is 576.6% higher than the 14.87x industry average. In addition, its forward EV/Sales and Price/Sales multiples of 14.10 and 11.32, respectively, are significantly higher than the 1.50 and 1.24 industry averages. Also,  PLNT’s 36.17 forward EV/EBITDA ratio is 243.9% higher than the 10.52 industry average.

The stock’s 51.35 trailing-12-month Price/Cash Flow ratio  is 365.3% higher than the 11.04 industry average.

Bleak Past Performance

PLNT’s revenues have declined at a 2.7% CAGR  over the past three years. Its EBITDA and EBIT have decreased at an annualized rate of 3.5% and 10.2%, respectively, over this period. The  company’s EPS has declined at a 23.1% CAGR  over the past three years, while its net income fell 24.1% over this period.

Weak Profit Margin

In terms of its trailing-12-month asset turnover ratio, PLNT’s 0.2% is 77.5% lower than the 1% industry average. The stock’s trailing-12-month ROTC and ROA of 6% and 1.3%, respectively,  are 13.2% and 75% lower than their industry averages. And its $118.39 million  trailing-12-month cash from operations compares to the $209.78 million industry average.

POWR Ratings Reflect Uncertain Prospects

PLNT has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. PLNT has a C Stability Grade. This is consistent with its 1.22 beta.

In terms of Value Grade, the company has a D, which is in sync with its higher-than-industry valuation multiples. Also, it has a D grade for Sentiment.

Click here to see the additional POWR Ratings for PLNT (Growth, Momentum, and Quality).

PLNT is ranked #29 of 35 stocks in the A-rated Athletics & Recreation industry.

Bottom Line

PLNT has failed to beat the consensus EPS estimates in each of the trailing four quarters. Although the company witnessed significant subscriber growth, negative investor sentiment surrounding indoor fitness operators as major U.S. cities impose vaccination mandates could cause PLNT’s shares to retreat in the near term. Furthermore, its premium valuation could  be a headwind. So, we think it’s better to wait for things to stabilize before betting on the stock.

How Does Planet Fitness (PLNT) Stack Up Against its Peers?

While PLNT currently has an overall C rating  in our proprietary rating system, one might want to consider looking at its industry peers Foot Locker, Inc. (FL) and Big 5 Sporting Goods Corporation (BGFV), which  have  A (Strong Buy) ratings.

PLNT shares were trading at $70.36 per share on Thursday morning, down $1.18 (-1.65%). Year-to-date, PLNT has declined -9.36%, versus a 17.72% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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