I love the Planet Fitness (PLNT) growth story that we've witnessed over the past few quarters. I don't like the price tag. Even with the strong earnings trend, I think the stock price is way too high. Beneath the revenue and earnings gains of the third quarter there is a lot of debt here that's clouding the health of the balance sheet. If Planet Fitness were to hit a snag in its growth story, I could see some big problems for the stock. Because of this balancing act, I view the stock as a hold. Or, it could be time for a profit taking sell.
One cannot deny the great results of the quarter. Revenues grew at a solid 40.2% to $136.7 million. That's pretty darn impressive. Same store sales grew 9.7% year over year vs. 10.2% growth in the second quarter. Operating income is up 28.32% to $43.57 million. Net income attributable to Planet Fitness increased 13.8% to $17.47 million. A higher share count than 2017 somewhat weakened the effects of the income growth; with diluted earnings per share rising $0.02 to $0.20 a share. That's an 11% gain.
By all accounts, these are good numbers. For the first nine months of the year, revenues are up 34.6% to $398.5 million. So why am I not jumping all over this stock? I simply can't get behind a stock that has run up so much debt, and is trading at such high multiples. As of the third quarter release, Planet Fitness has over $1.16 billion in long term debt. That debt has increased 66.7% since last year. Thanks to payments on borrowings, net interest expenses increased 100% to $17.9 million in the third quarter. Couple that with an 86% increase in "net total other expenses" to $15.9 million, and a big chunk of change was taken out of operating income prior to taxes.
The debt situation doesn't seem to be moving in the right direction either. Between Q2'18 and Q3'18, debt increased 67.4% from $693.95 million. That's a lot of debt in one quarter. Because of the liabilities, PLNT's balance sheet retains a deficit in total equity. A deficit of $110.15 million is less than last year's $136.94 million, but it still marked an increase from Q2'18's $91.24 million deficit.
The poor equity seems to make me far more nervous than others; but I can't get behind the share pricing with such a poor balance sheet. In the event of recession, I could see a great deal of people cutting back on gym memberships. They're not exactly a needed expense. You can jog outside. You can buy weights for less than $100 and workout at home. The utility of the membership is not the same as expenses like housing and food.
Up about 18% today (at the time of writing) after yesterdays release, the stock is simply too expensive relative to what they have. Yes the revenue growth is strong; but the actual assets of the business are negative. Estimates put the company's full year earnings at around $1.14. With $0.72 thus far, PLNT needs to create $0.42 per share in the fourth quarter; and that's assuming their total share count doesn't climb. Considering the growth they've been achieving, it's not necessarily impossible. I however think the bar is set pretty high with that one. Let's say they do hit $1.14. That would mean the stock is currently trading at roughly 49x full year earnings. That's way too rich for my blood. The market is bouncing today, and PLNT is along for the ride. Over the next year, I question whether this one can keep the momentum. Expectations have become quite high to say the least. $56 per share is a lot for a company with negative total equity. In the event of a slowdown, there'd be very little maneuvering for the company to do.