With greater health consciousness than ever before, fitness stocks have been among the key investment themes in the past year. This includes at-home fitness companies, gyms and companies providing various sports and fitness equipment.
One name that deserves mention is Peloton Interactive (NASDAQ:PTON). During the same period last year, PTON stock was trading at $42.80. With strong growth in revenue, the company’s stock surged by 300% to highs of $171.
However, the company has been embroiled in controversy, and the stock has slumped by 44% to current levels of $94. Let’s first talk about the controversy.
On April 17, the U.S. Consumer Product Safety Commission warned consumers against using Peloton Tread+. The CPSC cited incidents on children becoming entrapped, pinned and pulled under the rear roller of the product. On the same day, Peloton refuted the claims as misleading and inaccurate. However, on May 5, the company announced the voluntary recall of Peloton’s Tread+ and Tread treadmills.
Besides impacting growth in the near term, the incident has dented Peloton’s credibility. It will take time to rebuild consumer confidence.
This presents an opportunity for other fitness companies to increase their market share. The home fitness equipment market was worth $16.4 billion in fiscal year 2020. Over the next five years, the market is likely to grow at a compound annual growth rate (CAGR) of 2.75%.
Let’s discuss seven fitness stocks that are hoping to take Peloton’s crown.
- Nautilus (NYSE:NLS)
- Planet Fitness (NYSE:PLNT)
- WW International (NASDAQ:WW)
- Dick’s Sporting Goods (NYSE:DKS)
- Lululemon Athletica (NASDAQ:LULU)
- Forest Road Acquisition (NYSE:FRX)
- Nike (NYSE:NKE)
Fitness Stocks: Nautilus (NLS)
As I write on NLS stock, the company has reported strong earnings for the first quarter of 2021. Even after an upside of over 176% in one year, the stock looks attractive.
For Q1 2021, the company reported revenue growth of 119.9% on a year-over-year basis to $206.1 million. Growth was triggered by strong demand for connected fitness bikes and treadmills.
Another important factor, which could trigger stock upside, is the company’s improvement in earnings before interest, taxes, depreciation and amortization (EBITDA). For Q1 2021, EBITDA was $40.4 million, which implies an EBITDA margin of 19.6%. On a year-over-year basis, EBITDA margin expansion was 1,710 basis points. Therefore, as revenue growth sustains, the company is well-positioned to deliver robust cash flows.
Nautilus also has ambitious long-term growth plans. The company aims to achieve a turnover of $1 billion by FY2026. Currently, the company is focused on enhancing the digital transformation plan. The target is to have 250,000 members by FY2022. Furthermore, the company is targeting two million members by FY2026. The digital subscription business is likely to contribute to 20% of total revenue by that year.
Considering the growth plans, NLS stock might still be at the early stage of a long-term rally. With low debt and ample liquidity, the company is positioned for aggressive innovation-driven growth.
Planet Fitness (PLNT)
The vaccination rollout in the United States has been aggressive. According to the Centers for Disease Control and Prevention, 35% of the U.S. population has been fully vaccinated. Additionally, 46% have received at least one dose. This puts the U.S. on path for normalizing activities in the coming quarters.
Therefore, it makes sense to consider exposure to fitness stocks that run on a brick-and-mortar model. PLNT stock is attractive at current levels of $75. Year-to-date for FY2021, the stock is basically flat. A breakout on the upside seems imminent considering the reopening of the economy.
The company ended Q1 2021 with total number of members at 14.1 million. For each month of the quarter, the company experienced sequential net member growth. This is an early indication of the point that people are returning to gyms.
For Q1 2021, the company reported revenue decline of 12.1% on a year-over-year basis to $111.9 million. For the same period, adjusted EBITDA declined by 6.1% to $43.7 million. Clearly, revenue and EBITDA decline has decelerated on a sequential basis. It seems likely that the company will be back on a growth trajectory in the next one or two quarters.
WW International (WW)
WW stock is another name among fitness stocks that deserves a look. In particular, at a forward price-to-earnings (P/E) ratio of 23, the stock looks attractive.
As an overview, WW International is a provider of weight-management products and services. With people increasingly staying at home during the pandemic, the problem of obesity has been aggravated in the U.S.
Therefore, WW International is likely to witness sustained growth in memberships. As a matter of fact, the company ended Q1 2021 with “5.0 million subscribers, record digital subscribers, and member retention remaining at an all-time high of over 10 months.”
However, it’s worth noting that the number of digital subscribers was essentially flat on a year-over-year basis. I believe that this is likely to change in the next few years. A key reason is the launch of FY2022 food innovation. According to the company, “clinical trials are underway, and launch and marketing plans are in development.”
This evidence-backed food-innovation program for wellness and weight loss is likely to drive significant membership growth. Further, the company also plans to expand into the healthcare and diabetes market. Overall, WW stock look attractive at the current P/E, considering the potential growth acceleration in the next few years.
Dick’s Sporting Goods (DKS)
DKS stock has trended higher by 66% in the last six months. At a forward P/E of 17.24 and with a dividend yield of 1.65%, the stock still looks attractive.
Dick’s is a retail operator that provides sporting goods equipment, fitness equipment and golf equipment, among others. As the economy emerges from the Covid-19 pandemic, the demand for sports good is likely to accelerate. The stock has been trending higher discounting this factor.
One reason to like Dick’s is a gradual move toward omni-channel sales. For FY2020, the company reported revenue of $9.58 billion, which was higher by 9.5% on a year-over-year basis. E-commerce sales, however, surged by 100% to $2.8 billion. This translated into 9.9% growth in same store sales.
The company believes that the U.S. sporting goods market is worth $120 billion. Further, there has been a fourfold growth in health and fitness app downloads in FY2020, as compared to the previous two years. This trend is positive for the company as people are increasingly health-conscious.
From a financial perspective, the company reported $1.7 billion in cash and $1.9 billion in credit facility. This gives the company ample financial buffer for growth and shareholder value creation. Dividends are also likely to sustain and grow.
Lululemon Athletica (LULU)
LULU stock is down about 7% in the last six months. The company is another name in the fitness segment that deserves a mention. And the stock looks poised for upside in the coming quarters.
It’s worth noting that the company is primarily in the business of athletic apparel and footwear. However, in June 2020, the company acquired home fitness innovator, Mirror.
Mirror is an “interactive workout platform that features live and on-demand classes.” In the current times, at-home fitness has gained traction, and the acquisition could create value in the long-term. The acquisition also makes it clear that the company is looking to spread its wings beyond just fitness retail goods.
For Q4 2020, the company reported sales growth of 23.8% to $1.7 billion. Besides an increase in direct-to-consumer net revenue, strong numbers from Mirror were the key trigger for growth. It’s also worth noting that the company’s e-commerce revenue totaled $899.5 million, which was 52% of total revenue. The future of retail business is omni-channel, and Lululemon seems well-positioned on that front.
According to BTIG analyst Camilo Lyon, LULU stock has a price target of $434. This implies a potential upside of 41% from current levels of $308.
Forest Road Acquisition (FRX)
Special purpose acquisition companies (SPACs) have continued to provide attractive investment opportunities. FRX stock is worth considering among fitness stocks.
In February 2021, Beachbody LLC and Myx Fitness LLC announced a three-way merger with Forest Road. The combined entity will have business presence in digital fitness streaming and nutrition solutions.
For FY2020, the pro-forma revenue is expected at $893 million, with nutritional products being the largest revenue contributor. By FY2025, the company has guided for revenue of $3.3 billion. Further, adjusted EBITDA is expected at $532 million for FY2025.
The company is targeting 3.7 million digital subscriptions in FY2021. As digital subscriptions grow, its likely that EBITDA and cash flow will be robust.
It’s also important to mention that the merger is at a pro-forma enterprise value of $3 billion. This would be at 2.2 times FY2022 revenue. Therefore, valuations seem attractive, and FRX stock is worth considering at current levels.
After the SPAC business combination, the company also intends to pursue opportunistic merger and acquisition opportunities. The target business includes nutritional supplements and international digital fitness brands. Therefore, the company can use the inorganic route to accelerate growth.
In the fitness space, NKE stock is another attractive bet. Even for Nike, one of the growth triggers is digital sales. For Q3 2020, the company reported 59% increase in digital sales as compared to 3% growth in overall revenue.
Earlier this year, the Nike app was ranked No. 12 by number of downloads in Apple’s App Store. The app provides a mix of content and personalized commerce. The popularity of the app is an indication of the company using customer engagement to drive sales growth.
Another important point to note is that for Q3 2020, the company reported sales growth of 51% in Greater China. Even amid intense competition from local players, the market is big and can drive long-term revenue growth.
Coming back to the digital platform, the Nike Training Club app has 185 free on-demand workouts led by Nike’s Master Trainers. The app also has a premium version that costs $14.95 per month. This might not have a significant impact on revenue, but it does impact digital sales growth.
Overall, NKE stock is among the top fitness stocks to consider. In the last six months, the stock has moved higher by about 6%. The current consolidation might be a good accumulation opportunity.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.