Planet Fitness

At face value, Planet Fitness Inc looks inexpensive, following a substantial price decline over the past year. To account for the risk of a possible value trap, we have capped its rating at 3 stars. The stock currently trades at a 29% discount to our quantitative fair value estimate of $59.26 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The firm's balance sheet bolsters our valuation estimate. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. For example, the firm's EBITDA/interest coverage ratio of 4.9 lies in the bottom 30% globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be cheap.

On a different note, the company's valuation metrics are potentially concerning. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. The firm's book value yield of -19.2%, for example, lies in the bottom 10% globally. The market value of this company's shares looks expensive relative to the book (accounting) value of equity, which, despite our favorable price/fair value ratio, is a negative attribute.

The company's narrow economic moat rating suggests it should be able to maintain robust profitability for a decade or longer before competition erodes its advantage. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.