Over the past six months, Xponential Fitness’s shares (currently trading at $6.48) have posted a disappointing 11.1% loss, well below the S&P 500’s 8.4% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Xponential Fitness, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Xponential Fitness Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons why XPOF doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Xponential Fitness grew its sales at a 23.5% annual 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 relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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. Following the recent decline, the stock trades at 10.8× forward P/E (or $6.48 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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