Unyielding Share Surging by 55% in a Year's Time. Could It Be a Straightforward Purchase Chance?
The stock market has been thriving, largely due to a robust macro environment. Factors like potential lower interest rates and stronger economic growth might be contributing to its momentum.
One specific stock that's been shooting up is capturing my attention, having surged an impressive 55% within the past year, even outperforming the 32% total return of the broader S&P 500 index during the same period. But does this considerable surge imply that the business represents an unmissable purchasing opportunity at the moment?
Reporting robust results
The company outperforming the market in the previous year is none other than Planet Fitness (PLNT -1.20%). The franchise owner and operator of budget-friendly fitness centers recently revealed its third-quarter financial results for 2024, which revolted investors with enthusiasm.
In the three-month span, Planet Fitness reported a 5.3% year-over-year income growth. This increase was driven by a 4.3% same-store sales boost, coupled with the opening of 21 new net locations. Currently, there are 2,637 Planet Fitness fitness centers in operation.
Pleased with the results, the management revised their 2024 forecast, now expecting a revenue surge of 8% to 9%, in contrast to their previous outlook of between 4% to 6%.
Through the first nine months of 2024, Planet Fitness produced $295 million in operational cash flow. This marked a 10% increase compared to the same period last year. This noteworthy growth was sufficient for executives to authorize a fresh $500 million share buyback program.
Eyeing future growth
Growth-oriented investors are always drawn to tantalizing growth stories. The conviction is that if a business can expand swiftly, sales and profits will likewise skyrocket. Planet Fitness might be piquing the interest of these growth investors.
Planet Fitness' leadership, led by CEO Colleen Keating, thinks the company's outlook is very promising. They envision the possibility of 5,000 fitness centers operating across the U.S. one day, further solidifying Planet Fitness' industry position. This objective would essentially double Planet Fitness' existing physical footprint.
Whether this is a realistic goal or not remains to be seen. On the one hand, executives may simply be casting a large number to spur investment community interest. An opposing perspective may argue that future growth may not resemble the past, as Planet Fitness evolves as a company and suitable real estate for new locations becomes increasingly scarce.
But on the other hand, reaching 5,000 gyms is also a plausible target. There are approximately 41,000 fitness studios scattered across the nation. I don't think it's a far-fetched notion for Planet Fitness to one day command a 12% share, still leaving the industry largely fragmented.
If management begins to make progress toward this goal, it's simple to remain hopeful that sales and profits will skyrocket in the long term. As 90% of the stores are franchised, Planet Fitness employs a capital-light model that should, theoretically, scale up profitably.
Is Planet Fitness a shrewd investment?
Discovering enduring success in the fitness sector is challenging, as consumers tend to lose interest in their workout routines. Adding to the challenge is the fact that they often get attracted to the latest fitness trend due to whimsical preferences. However, Planet Fitness has managed to buck this trend. It's a dynamic and profitable enterprise that is expected to continue enjoying success in the future.
Nevertheless, I believe the company's current valuation demands further scrutiny. At the time of this writing, shares of Planet Fitness trade at a forward P/E ratio of 40. This leaves no buffer for prospective investors. Only the most optimistic supporters who think growth will be boosted dramatically should contemplate buying the stock right now.
If you, like me, prioritize valuation in your investment decisions, then it's advisable to wait before incorporating Planet Fitness into your portfolio.
Based on the financial performance and growth potential of Planet Fitness, individuals interested in finance and investing might consider exploring opportunities to invest in the company's shares. The company's robust financial results, including a 5.3% year-over-year income growth, have caught the attention of investors, leading some to believe that its current valuation, with a forward P/E ratio of 40, could present a challenging entry point for potential investors focused on value.
To further support their investment decisions, some investors may look into diversifying their portfolio by investing in other sectors, considering alternative investment vehicles, or exploring strategies aimed at compensating for the potential risks associated with investing in stocks at high valuations.
