Planet Fitness Shorts Can Reap 30% Profits

The recent market rally has been very impressive. Although the S&P 500 is just a few percentages off all-time highs, I think the recent rally will not last. For this reason, I think investors should start shorting overvalued stocks instead of having only a long-only portfolio.

I have recommended shorting many companies over the last few months and in this article, another stock that I think is a great short right now is Planet Fitness (PLNT). Planet Fitness, Inc., through its subsidiaries, franchises and operates fitness centers. The company operates in three segments: Franchise, Corporate-owned stores, and Equipment.
The Franchise segment is involved in the franchise of fitness centers in the United States, Puerto Rico, and Canada. The reasons why I recommend shorting Planet Sports are mentioned below.

Valuation and competition

Planet Fitness is trading at a very expensive valuation. With a trailing P/E of 29 and high debt, I think Planet Fitness is a great short. Planet Fitness has a total debt of $503 million as opposed to total cash of less than $30 million.

In addition, Planet Fitness operates in a very competitive environment with ever-changing dynamics that makes the stock’s valuation absurd. With competition growing, Planet Fitness will find it very difficult to meet its growth estimates.

In addition, Planet Fitness also has very small margins. Last year, despite the fact that Planet Fitness’ revenue jumped almost 20%, its net income only increased 2.4%. Planet Fitness’ subscription based business model has witnessed strong growth but there is very small sustained revenue per member each time a member uses the club. As a result, the company’s profitability is low and its business model not sustainable in the long-term. Given the slow earnings growth, it will be impossible for Planet Fitness to grow into its current valuation.

Planet Fitness is IPOed at $16 and the stock is trading around 10% lower than that, however I think it has about 30% more downside potential from this level.

Conclusion

Planet Fitness’ valuation is too high given the company’s weak income generating ability. With a trailing P/E of 29 and net debt of almost half a billion dollars, Planet Fitness is a compelling short at this point in time. The company’s business model is not sustainable in the long-run, which is why I think investors should short the stock.
Published on Mar 16, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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