Peloton produces profit for the first time amid pandemic-demand spike, stock pushes toward new record

Peloton Interactive Inc. reported fiscal fourth-quarter earnings Thursday afternoon.

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A year after its initial public offering, Peloton Interactive Inc. is pedaling toward new highs amid a pandemic that is forcing people into their homes and away from gyms, creating demand for at-home fitness equipment.


on Thursday wrapped up its fiscal year by reporting that sales and subscribers roughly doubled in the 12-month period, and revealed its first profitable quarter as a public company and record quarterly revenue a little less than a year after its September 2019 IPO. Shares fell 3.8% Thursday from Wednesday’s record closing price of $91.17 — more than three times the IPO price of $29 a share — but pushed back toward record highs in after-hours trading following the release of the report, with gains of more than 7%.

Peloton reported fiscal fourth-quarter profit of $89.1 million, or 27 cents a share, on sales of $607.1 million, up from $223 million a year ago. Peloton reported a net loss of $47 million in the fiscal fourth quarter a year ago, just ahead of its IPO. Analysts on average expected earnings of 10 cents a share on sales of $586 million, according to FactSet.

“It has been another staggering year of growth, and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services,” Chief Executive James Foley said in a conference call Thursday. “The strong tailwind we experienced in March as the COVID-19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.”

While still attempting to catch up to a flood of orders amid the COVID-19 pandemic — Peloton said Thursday it does not expect order-to-delivery times to normalize until around the end of the calendar year — the company is also looking to expand its customer base. On Monday, Peloton announced that it will reduce the price of its standard exercise bike and introduce a lower-priced treadmill, which could clear a path for potential buyers who were not willing to pay the large upfront costs for its products. It will also introduce a premium bike for fans who want top-of-the-line equipment.

Wedbush analysts noted that in a previous survey of 1,200 people, they found that Peloton could “dramatically improve” sales at a lower price point, especially in treadmills.

“42% of non-Peloton owners that were interested in fitness and familiar with the brand showed some level of interest in a $2,500 Tread, compared to just 30% showing interest in the current Tread,” the analysts wrote in a Sept. 9 note, after Peloton announced its new lineup. “Among existing Peloton bike owners, the number of respondents saying they would be ‘very interested’ in owning a treadmill from Peloton doubles based on the lower price, from 14% based on the $4,295 price point to 28% assuming a theoretical (at the time) $2,500 price point.”

While lower sales prices could hurt hardware margins and average selling prices, much of Peloton’s long-term prognosis focuses on the subscriptions for interactive workout media that owners continue to pay after they have received the equipment. Peloton announced Thursday that it now has 1.09 million subscribers, nearly doubling the 511 million that it reported at the end of its last fiscal year, topping its forecast of 1.04 million to 1.05 million.

In total for the fiscal year, Peloton collected revenue of $1.46 billion from the sale of equipment and $363.7 million from subscription services, up from $719 million and $181 million, respectively, in the previous fiscal year. Combined with other revenue from merchandise and other offerings, Peloton ended the year with $1.83 billion in sales, up from $915 million.

“By the end of FY 2020 our Peloton membership base grew to approximately 3.1 million, compared to 1.4 million members in the prior year,” Peloton detailed in a letter to shareholders Thursday. “Fueled in part by the challenges associated with COVID-19, member engagement reached new highs with 164 million Connected Fitness Subscription workouts completed in FY 2020.”

For the current fiscal year, which began in August, Peloton predicted htat subscribers and revenue would roughly double yet again. The company guided for revenue of $3.5 billion to $3.65 billion, with connected subscribers swelling to 2.05 million to 2.1 million. Analysts on average were predicting revenue of $2.74 billion and subscribers of 1.78 million ahead of the report, according to FactSet.

Peloton stock has gained more than 260% since its IPO; the S&P 500 index

has returned 17.7% in that time. In after-hours trading Thursday, shares topped $94 following the release of the report.

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Truist Produces The Sound, The Market Provides The Fury – Truist Financial Corporation (NYSE:TFC)

Admittedly, that title is a little overheated, but the market reaction to Truist’s (TFC) first quarter as Truist was not particularly positive, with analysts and investors fretting about a longer timeline to expense synergies and a greater income contribution from non-core amortization. The disappointment moderated somewhat after the call, but the reality is that Truist didn’t offer the sort of positive operating leverage story that investors really want now.

Given the complexity in modeling the merger, I wasn’t going to put much faith in this first quarter, whatever the results. I think this merger still makes a lot of sense from a strategic standpoint, but I also see a lot of execution challenges and management will have to rise to the occasion. With core underlying core earnings growth potential of around 5%, I believe these shares are undervalued below the high $50’s.

A Tough Quarter To Assess

With little agreement even in the “consensus” estimates (different sources produced some significantly different numbers), assessing Truist’s fourth quarter is even more complicated. Likewise, you could argue about whether you should compare the results to BBT’s third quarter or a Frankenstein creation of BB&T and SunTrust combined.

Relative to BBT’s last quarter, revenue rose 25% qoq, and revenue did beat expectations (by anywhere from 4% to 13%, depending on the source). Although core net interest margin was down 15bp on a sequential basis, BBT benefited from higher purchase accounting accretion and average earning asset balances were higher. Core fee income looked a little light to me, though insurance (up 5%) was fine.

Core expenses were higher than expected, coming in almost 10% higher than analysts expected. I’m surprised less by the number that Truist posted than I am in how the average analyst estimate didn’t change more into the quarter, given that Truist management had presented at events (including sell-side conferences) talking about a higher expense trajectory. Pre-provision profit came in a little light of expectations, but by less than 1%. One area where there was a lot less noise in expectations was in tangible book value per share. Truist beat by 1%, and maybe that’s the takeaway for the quarter.

Capital (the CET1 ratio) did come in lower than expected. Management had been telegraphing this, but I still saw some analysts with expectations of over 10% versus the 9.44% that the bank reported. A bigger hit from loan marks to the SunTrust portfolio explains a lot of this, but it does have investors fretting about the prospects of capital returns in 2020, though management indicated on the call that they might have some flexibility where their former 10% target is concerned.

Balance Sheet Items Were Likewise Noisy

Truist did come in with a higher period-end loan figure than the sell-side expected, but I can’t really say whether that’s due to inherent outperformance or inadequate modeling (I lean toward the latter). C&I lending looked a little light to me, despite growth in mortgage warehouse lending, with higher paydowns taking a toll. Loan yields looked basically okay. On the deposit side, it looks like core non-interest-bearing deposits held up alright, and core deposit costs remain quite good – one of the strengths of the bank.

Competitive And Internal Challenges Are Significant

There’s a reason that mergers of equals are not common – they’re difficult to successfully execute and integrate, and this is a large deal that will fully tax management’s capabilities. While the initial expense reduction target looked high relative to past mergers of equals, most of those didn’t have the same footprint overlap, and that should simply the process of driving cost reductions through branch closures and the like.

Management did stretch out its timeline for realized expense reductions – from 50% in 2020, 90% in 2021, and 100% in 2022 to 30%/65%/100% and the Street definitely didn’t like that. Most of the cause of this a delayed schedule for branch closures, and I don’t see a need for Truist to rush this process just to meet an arbitrary timeline. As a reminder, there is significant branch consolidation potential here – 60% of SunTrust branches are within two miles of a BB&T branch.

Operationally, I’ll be curious to see how splitting up the business works out, with the headquarters in Charlotte, the commercial banking operations in Winston-Salem and the consumer banking operations in Atlanta. I think it’s a matter of time before those businesses are brought together in Charlotte, but I could well be wrong about this. Time will tell.

Also on the operational side, a lot of Truist’s competitors are counting on significant, if not severe, disruption to the operations of the bank through this integration process. It’s not uncommon for bankers to leave after deals like this, and it’s likewise not uncommon for customers to rebalance their own exposures (particularly on the commercial side). Pinnacle (PNFP) has explicitly called the disruption in the Atlanta market (where Truist has very strong deposit share) a once-in-a-generation opportunity, and Synovus (SNV) has accelerated its own hiring efforts to gain share. And those are just two banks – many others are looking at markets like Baltimore, Washington, Charlotte, Raleigh-Durham, and Miami opportunistically, assuming that Truist is going to be vulnerable to a concerted competitive effort.

The Outlook

I don’t dismiss the operational challenges Truist is facing, nor do I dismiss the risk of dislocation and disruption leading to some business losses to competitors. On the other hand, I wouldn’t ignore or dismiss the strong branch-based business Truist has, nor its strong presence in commercial lending – an operational that should get stronger now with cross-selling opportunities between former BB&T and SunTrust customers.

My modeling assumptions work out to a long-term core earnings growth rate of around 5% assuming a long-term total payout ratio (dividends and buybacks) in the high 80%’s. If management hits its goal of low-20%’s ROTCE in a few years, it will be one of the most profitable banks by that metric, and that could drive significant valuation upside (more than 0.5x in P/TBV terms).

The Bottom Line

Between discounted core earnings and near-term ROTCE-driven P/TBV, I believe Truist shares should trade in the mid-to-high $50’s. That suggests that Truist is one of the cheapest banks among the large-caps that I follow – almost on the order of Citi (C) and Wells Fargo (WFC). While Truist doesn’t have the same sort of challenges and issues as those two banks, Truist has its own significant challenges, and I do see higher execution risk here (I increased my discount rate slightly). Still, on balance, this is an undervalued name for more aggressive investors to consider.

Disclosure: I am/we are long TFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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