This 'smart fitness' mainstay has mismanaged itself into the ground...

At the height of the pandemic in May 2020, luxury exercise-bike maker Peloton Interactive (PTON) looked unstoppable.

Sales were up 66% in the first pandemic-laden quarter. With most gyms closed and quarantine in full force, folks were desperate for a way to exercise at home.

But even as Peloton's popularity soared, it was already the beginning of the end.

The company couldn't ramp up manufacturing fast enough. Wait times to get a bike delivered rose to months, not weeks. And impatient would-be customers started to look elsewhere for their home-fitness needs.

Safety recalls made matters worse. Almost as soon as Peloton finally caught up to demand, it had to backtrack on multiple products. Costs rose out of control.

In 2022, Peloton laid off nearly half its employees. But it wasn't enough. Shares are down 97% from the pandemic peak... and its bonds are following suit.

The company hasn't given up. It signed an agreement with athleisure-apparel giant Lululemon Athletica (LULU) earlier this month. It will act as Lululemon's exclusive digital-content provider.

That's a good way to get more brand exposure. But as we'll explain, Peloton is still facing a mountain of debt... and its credit setup is a disaster.

It will take a lot more than one good deal to fix this pandemic darling...

Back in early 2022 – before interest rates started rising – Peloton issued $1 billion worth of interest-free bonds...

In other words, the bond doesn't make coupon payments.

But even without coupon payments, the bond (which matures in February 2026) currently yields over 13%. That's more than twice what a similar-duration U.S. Treasury note would get you.

At first glance, this could look like an attractive bargain investment... especially if you believe Peloton is poised for a comeback.

But that nosebleed-level yield should be a flashing warning sign.

Remember, as bond prices drop, yields tend to rise. Investors bid down the price of bonds they perceive as less safe, and demand a higher yield to compensate them for the risk.

This February 2026 bond trades for 77 cents on the dollar. And as we said, its yield is above 13%.

Said another way, investors aren't confident that Peloton can meet its debt obligations.

We're not confident in Peloton, either...

And we can see why through our Credit Cash Flow Prime ("CCFP") analysis.

The CCFP gives us a more accurate sense of a company's overall health. It compares financial obligations against cash position and expected cash earnings.

In the chart below, the stacked bars represent Peloton's obligations through 2029. This is what it needs to pay in order to keep the lights on... to prevent the company from collapsing.

We compare these obligations with cash flow (the blue line) and cash on hand at the beginning of each period (the blue dots).

As you can see, there's no way Peloton can afford to pay creditors back in 2026...

Peloton doesn't even have enough cash flow to cover any of its obligations this year. It will have to rely on cash on hand.

And its credit picture doesn't look any better down the line... A huge debt headwall in 2026 and 2027 will leave it scrambling.

Even though Peloton has been making some positive moves, its credit picture is very scary at the moment. It will take more than one promising announcement to convince us otherwise.

This is what we normally expect to see when a company's bond yields 13%... imminent issues with debt headwalls.

The next time a yield seems too good to be true, take a closer look at looming obligations. You might find a disaster brewing under the hood.


Rob Spivey
October 18, 2023

P.S. When the recession hits, we'll see a lot more risky setups like Peloton. But if you know what you're looking for, you can also find safe credit-market bargains... while everyone else is running for the exits.

My team and I just identified one of those opportunities in our latest issue of Credit Cashflow Investor. It was issued by a well-known athletic-apparel retailer that fell on some tough times. Like Peloton's bond, it matures in 2026... But importantly, it has plenty of cash to pay us back.

And thanks to the market's fear, it's yielding 7.6% – which is much more than it should offer at this level of safety.

The bond is trading close to our buy-up-to price today. I'm confident it could climb even higher in the coming months... So it's crucial that you buy in soon. Learn how to access our brand-new recommendation (plus $7,400 in free research and reports) by clicking here.