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Dec 5

Are Planet Fitness, Inc. (NYSE:PLNT) Investors Paying Above The Intrinsic Value? – Simply Wall St

Fitness Comments Off on Are Planet Fitness, Inc. (NYSE:PLNT) Investors Paying Above The Intrinsic Value? – Simply Wall St

How far off is Planet Fitness, Inc. (NYSE:PLNT) from its intrinsic value? Using the most recent financial data, well take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to todays value. This is done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a companys value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Planet Fitness

Were using the 2-stage growth model, which simply means we take in account two stages of companys growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these arent available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in todays dollars:

(Est = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$1.9b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 1.7%. We discount the terminal cash flows to todays value at a cost of equity of 7.4%.

Terminal Value (TV)= FCF2029 (1 + g) (r g) = US$346m (1 + 1.7%) 7.4% 1.7%) = US$6.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.3b ( 1 + 7.4%)10= US$3.1b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$5.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$73.0, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula garbage in, garbage out.

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You dont have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a companys future capital requirements, so it does not give a full picture of a companys potential performance. Given that we are looking at Planet Fitness as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation weve used 7.4%, which is based on a levered beta of 1.036. Beta is a measure of a stocks volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Although the valuation of a company is important, it shouldnt be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to what assumptions need to be true for this stock to be under/overvalued? If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price to differ from the intrinsic value? For Planet Fitness, Ive put together three relevant aspects you should further research:

PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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Are Planet Fitness, Inc. (NYSE:PLNT) Investors Paying Above The Intrinsic Value? - Simply Wall St

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