Over the past six months, Xponential Fitness’s shares (currently trading at $14.68) have posted a disappointing 7.4% loss, well below the S&P 500’s 6.1% gain. This 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? Check out our in-depth research report to see what our analysts have to say, it’s free.Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why XPOF doesn't excite us and a stock we'd rather own.
Why Do We Think Xponential Fitness Will Underperform?
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
1. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Xponential Fitness’s five-year average ROIC was negative 14.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.
2. 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 typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, Xponential Fitness’s ROIC has decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Xponential Fitness’s revenue to rise by 1.8%, a deceleration versus its 21% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Xponential Fitness, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 8.4× forward price-to-earnings (or $14.68 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at Yum! Brands, an all-weather company that owns household favorite Taco Bell.
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