Is Planet Fitness (PLNT) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Planet Fitness Inc (NYSE:PLNT). The stock, which is currently priced at 49.18, recorded a gain of 4.75% in a day and a 3-month decrease of 27.26%. The stock's fair valuation is $126.9, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Risks Associated with Planet Fitness
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Planet Fitness should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.18. These indicators suggest that Planet Fitness, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Planet Fitness Inc
Planet Fitness Inc is a franchisor and operator of fitness centers in the United States. The company's reportable segments are Franchise, Corporate-owned stores, and Equipment. Franchise segment includes operations related to its franchising business in the United States, Puerto Rico, Canada, Panama, Mexico and Australia, Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughout the United States and Canada, and The Equipment segment includes the sale of equipment to franchisee-owned stores in the U.S. The firm generates a majority of its revenue from the Corporate-owned stores segment.
Here is the income breakdown of Planet Fitness:
Dissecting Planet Fitness's Low Altman Z-Score
A dissection of Planet Fitness's Altman Z-score reveals Planet Fitness's financial health may be weak, suggesting possible financial distress.
Conclusion: Navigating the Value Trap
Despite its seemingly attractive valuation, the low Altman Z-score of 1.18 and other risk factors suggest that Planet Fitness might be a potential value trap. Investors should exercise caution and conduct thorough due diligence before making an investment decision.
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This article first appeared on GuruFocus.
