Peloton (NASDAQ:PTON) has come a long way since one particularly awkward advertising effort roughly this time last year. While some cringed at the thought of giving a young woman exercise equipment for Christmas, the notion resonated, and sales took off. Now, Peloton has just made one major new move that should be drawing investors' attention even harder than an awkward but ultimately relatable ad campaign: the purchase of exercise equipment maker Precor.
One Big Buy for Peloton
While the deal to buy Precor was substantial for Peloton—it ran $420 million, after all—it's what Peloton got for its money that will make the biggest impact. Not only does Peloton get a competitor out of the way—by some reports a fairly strong competitor too—but it also gets a whole lot of new market firepower.
Part of the deal includes Precor's current factory spaces in North Carolina and Washington state. The combined real estate acquired along with Precor works out to be around 625,000 square feet of space that's already geared toward building exercise equipment. What's more, Peloton also has Precor's research and development operations, including all 100 employees therein, should Peloton choose to keep them on staff. It's a safe bet no one's getting fired from that division.
Once concluded, Precor will be a complete business unit, part of Peloton's overall operations. The deal is expected to go through early in 2021, reports note.
Analysts Hopping on the Peloton Bike
A stationary bike should never go places, but a stationary bike maker, now that's different. In fact, based on our latest research, that's just what analysts think will happen. Peloton has enjoyed a consensus rating of “buy” for the last six months, and the ratio hasn't even changed all that much to determine the “buy” rating. Currently, Peloton has one “sell” rating, three “hold” and 23 “buy”. That's the same ratio it had a month ago. Three months ago—and it was the same six months ago—it had one “sell” rating, three “hold” and 25 “buy.” It's clear that Peloton's assessment from the analyst sector doesn't change much.
What did change substantially, though, was Peloton's price target. Six months ago, the company was expected to sell at $50.72. Now, you wish you could buy it at that price, as the latest consensus target is looking for $130 even, and that represents just over a 20% downside over current prices. Just today, five different analysts have raised their price targets on Peloton stock.
Stepping Up its Cyclic Rate
This move is absolutely brilliant, and if anyone were sitting on the fence about picking up Peloton stock, this move should utterly wipe out any of those stray misgivings.
With this acquisition, Peloton has managed to take out several of its biggest problems in one fell swoop. It's not only removed a competitor from the market, but it's done a lot more than that. Granted, Precor wasn't exactly a household name, but it was a big name in the commercial exercise sector. Your neighbors may not have been familiar with Precor, but it's a safe bet their gym was. Now, Peloton can open up the potential of getting in on that market, and will have a nice halo effect going in as many of those commercial buyers were already in on Precor. Getting them in on Peloton should be a fairly simple sales call, especially when they find out Precor is Peloton now.
Better yet, Peloton's acquisition of a whole lot of pre-tuned factory space allows Peloton to better address one of its biggest weak spots: wait times. Peloton's recent successes have left it hard-pressed to keep up, and now, with Precor's factories kicking in, Peloton is that much better suited to meet current demand. That reduces churn and keeps people from looking too closely at other equipment makers because Peloton's waiting list just shrank considerably.
Granted, there's the issue of artificial demand to address here, caused by the burgeoning everything-at-home lifestyle caused by the coronavirus and government reaction to same. With gyms starting to open back up all over—even Michigan, which is on another wave of lockdowns, largely left gyms alone this time around—there may be some decline in the home exercise market. However, people remembering last March may want to be prepared accordingly, and that makes setting up a home gym against what was previously thought impossible—the required closure of several kinds of business—suddenly quite possible.
So with the Precor acquisition, Peloton can break into new markets, better address its current backlog of orders, and even improve its chances of generating future business. This all should mean good things for Peloton, both now and in the future. That's the kind of outlook that makes for a very attractive buy.
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