Please ensure Javascript is enabled for purposes of website accessibility

Does the Precor Acquisition Make Peloton a Buy?

By Rich Duprey - Jan 15, 2021 at 9:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The home fitness company gains entry to new markets, but ones that have been devastated by the pandemic.

The stock of Peloton Interactive (PTON -1.49%) soared after the maker of high-end home fitness equipment announced it was buying smaller rival Precor for $420 million. Investors bet that Peloton would gain entry into the commercial market of hotels, spas, and fitness clubs that was largely closed off to it before.

Yet unlike the home fitness industry, which became enormously popular during the COVID-19 pandemic, the commercial fitness market was severely damaged, and many gyms and fitness clubs went out of business.

So is Peloton's purchase of Precor as good as it seems? Let's find out.

Woman on a connected fitness bike

Image source: Peloton Interactive.

Waiting on relief

Arguably the biggest benefit of the Precor acquisition is that it gives Peloton access to 625,000 square feet of U.S. manufacturing space, along with in-house tooling and fabrication, product development, and quality-assurance capabilities.

Peloton's products are made by third-party contract manufacturers throughout Asia, primarily in Taiwan. Bringing at least some of its manufacturing into the U.S. will allow Peloton to ship home fitness equipment to its customers sooner. Shipment delays have been among the biggest problems facing Peloton during what otherwise should be a boom period.

CEO John Foley pointed out during the company's fiscal first-quarter earnings conference call in November that Peloton was incurring significant expenses related to shipment delays. He noted product wait times were affected by port congestion, periodic warehouse closures because of the pandemic, forest fires on the West Coast, and hurricanes, which caused the company to reschedule many deliveries. The delays have caused growing numbers of customers to cancel their orders.

A wedge issue

That gives rivals like Nautilus (NLS 4.71%) and others a chance to steal customers and market share. Nautilus saw its revenue surge over 150% in the same three-month period, allowing it to report net profits of $33.8 million, compared to an $8.8 million loss the year before.

Nautilus also benefited because its products are notably more affordable than those of Peloton, which has tried to make its equipment more accessible by producing a treadmill and stationary bike in the low-$2,000 range. In comparison, Nautilus' most expensive treadmill is around $1,300.

But the real hooks for most well-heeled consumers buying a Peloton bike or treadmill are the connected classes it offers while using the equipment, and even there Peloton has lowered the cost of a subscription.

A new way for Peloton to train

The Precor acquisition also gives Peloton a buffer against the eventual return to normalcy that ought to follow COVID-19 vaccines being widely distributed. Because, like new year's resolutions for weight loss that are quickly abandoned, many consumers who purchased home fitness equipment during the lockdowns will return to their preferred workout venue. 

No doubt quite a number will keep up with their new at-home regimen, but others have already bounced back to their routines as gyms and spas reopened, and others will gradually return.

A big world outside

U.S. gyms are a $44 billion opportunity compared to $4 billion for the home fitness market. Even accounting for the damage wrought on the industry by the pandemic, it's a much more dynamic market for Peloton.

Precor gives Peloton the ability to offer these out-of-home venues more than just stationary bikes and treadmills, and at the same time could allow it to introduce to the home fitness market Precor's lineup of adaptive motion trainers and elliptical machines, as well as design a complete portfolio of products.

Still, the International Health, Racquet & Sportsclub Association says as many as 25% of all gyms could permanently close because of the pandemic, minimizing the reach Precor provides.

Feeling fit

Buying Precor looks like a good fit for Peloton, though it might not result in immediate benefits beyond helping it resolve its shipment delays.

This is a tie-up whose real benefit is the long-term gain down the road, much like exercise itself: You don't see a transformation right away, but only over time.

Peloton Interactive should see similar results once this deal closes, making its stock a buy now, particularly on any weakness seen.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
$14.51 (-1.49%) $0.22
Nautilus, Inc. Stock Quote
Nautilus, Inc.
$2.67 (4.71%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.