3 Indirect Ways to Profit From the Housing Boom

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There’s not much that can stop U.S. home prices from rising these days. Research firm CoreLogic recently reported that home prices in April rose 12.1% from the previous year -- the 14th consecutive monthly increase and the largest year-on-year gain since February 2006. Last month, I highlighted three stocks to invest in to capitalize on the housing boom: lumber giant Weyerhaeuser, homebuilder D.R. Horton, and home improvement retailer Home Depot.

Today, I’ll focus on three other ways to play the housing boom via another industry -- beds and furniture -- which will remain in high demand as home sales rise.

A tale of foam and coils

Tempur-Pedic International completed the acquisition of its rival, Sealy, back in March for $1.3 billion, creating the largest publicly traded mattress and pillow maker in the country -- Tempur Sealy (NYSE: TPX)

For several years, Tempur-Pedic held a niche market in foam mattresses, which are based on NASA technology. However, in recent years, Tempur-Pedic has lost that niche to privately held rivals Simmons Bedding and Serta, which also started producing foam mattresses. This battle has also led to margin-crushing price reductions across the industry. Last April, Tempur-Pedic stock plunged nearly 50% in a single day after the company gave a bleak full-year forecast that revealed that its market share was shrinking at a faster-than-expected rate.

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To spur growth again, Tempur-Pedic acquired Sealy, which had been struggling to survive for the past six years. Sealy, which owns the Posturepedic and Stearns & Foster brands, manufacturers traditional spring coil beds, which complemented Tempur-Pedic’s foam mattresses. Although merged, the two companies still operate independently with two CEOs - Larry Rogers at Sealy and Mark Sarvary at Tempur-Pedic.

During the first quarter, Tempur Sealy reported adjusted earnings of $0.62 per share, or $38.2 million. This topped Thomson Reuters’ consensus by a penny. Meanwhile, revenue rose 1.5% year-on-year to $390.1 million, also beating the consensus estimate of $347.27 million. Tempur Sealy’s top line included $46.7 million in sales from Sealy. Excluding Sealy, Tempur-Pedic’s sales would have declined 10.7% from the prior year quarter, weighed down primarily by weak North American sales.

Although Tempur-Sealy’s earnings aren’t particularly impressive, they show that the company has managed to stop the bleeding that nearly sank the company last year. Acquiring Sealy was a good move that allowed it to diversify its product line and grow its top line again. Considering that the stock is still down nearly 4% over the past twelve months but is trading at 12.4 times forward earnings with a five-year PEG ratio of 1.2, I think that this stock could slowly recover as demand for new beds rises along with the housing market.

Tuck your cash under this mattress

For investors who think Tempur Sealy’s growth might be too sluggish, investing in brick-and-mortar retailer Mattress Firm (NASDAQ: MFRM), which carries mattresses from Tempur Sealy and its rivals, might be a better alternative. Mattress Firm has been under pressure for most of the past year due to concerns regarding shaky consumer confidence and the pricing war between mattress companies. However, Mattress Firm’s first-quarter earnings came in better than anyone expected, and shares recently surged to a 52-week high.

For its first quarter, Mattress Firm earned an adjusted $0.38 per share, rising 24% from the prior year quarter and topping analyst estimates by $0.02. Revenue also rose 32% to $276 million. It also offered full year revenue guidance of $1.24 billion to $1.25 billion, which topped the consensus estimate of $1.23 billion. Its full-year earnings guidance was in line with analyst estimates.

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Mattress Firm expanded heavily last year, purchasing 181 Mattress Giant stores, 34 Mattress Xpress stores, and 27 stores from Factory Mattress & Water Bed Outlet of Charlotte. Mattress Firm’s aggressive growth has fueled a massive market consolidation of mattress retailers, and that growth is reflected in its strong top and bottom line growth. However, same-store sales, which exclude all of these new stores added over the past year, slid 5.2%. Mattress Firm expects same-store sales to rise to a “low single-digit” percentage by the end of the fiscal year next January.

Wedbush analyst Joan Storms recently gave the stock a notable upgrade, bumping up the price target from $40 to $45, stating that the company’s recent acquisitions and rising demand for mattresses would benefit the company later this year. Shares of Mattress Firm are considerably more expensive than Tempur Sealy, trading at 16.7 times forward earnings, but it has a much lower five-year PEG ratio of 0.78, suggesting much stronger bottom line growth ahead.

Out with the new, in with the old

Haverty Furniture (NYSE: HVT), which was founded in 1885, will also benefit from robust demand for mattresses and furniture. The company has struggled in recent years after the housing bubble caused annual earnings to plunge nearly 90% in 2007. The subsequent financial crisis in 2008 and 2009 sent the company deep into the red.

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Yet, Haverty has been incredibly resilient. The company bounced back strongly in 2012, reporting full-year earnings of $0.67, proving that it would take more than a few years of unprofitability to finish off this old company. After all, this is the same company that went public in 1929 and survived The Great Depression, along with all of the subsequent economic shocks to date.

Haverty’s first-quarter earnings, reported on May 1, indicated that this winning streak would continue throughout 2013. Diluted earnings per share more than tripled to $0.36, while revenue rose 13.8% to $186.1 million. Same-store sales surged 11.5%. Moreover, analysts still expect the company to grow its full-year earnings by 63% in fiscal 2013.

Although shares of Haverty have more than doubled over the past twelve months, it is still trading at 16.9 times forward earnings with a five-year PEG ratio of 1.56. While this suggests that its growth is leveling off, it still has room to run, especially if the housing market continues to improve.

The Foolish bottom line

If you believe that the housing market is still growing at a healthy rate, and not a bubble, as some bearish analysts claim, then bed and furniture stocks are a conservative, indirect way to cash in on that growth.

Tempur Sealy is a classic value stock, largely ignored by investors, but it could turn around in the coming year, thanks to its strategic merger with Sealy. Mattress Firm is a solid growth stock, and is well poised to profit handsomely from the housing boom thanks to its aggressive expansion. Last but not least, Haverty Furniture is a proven survivor that could continue outgrowing the rest of the industry at a double-digit rate.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Tempur-Pedic International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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