Xponential Fitness has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.8%. The stock now trades at $8.55, marking a 15.4% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Xponential Fitness, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Xponential Fitness Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Xponential Fitness for now. Here are three reasons we avoid XPOF and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Xponential Fitness grew its sales at a 24.1% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Xponential Fitness has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.3%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Xponential Fitness’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Xponential Fitness falls short of our quality standards. With its shares beating the market recently, the stock trades at 13.2× forward P/E (or $8.55 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Xponential Fitness
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