Can Investors Trust Tempur-Pedic Again?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are very few products that have completely revolutionized their respective markets. Tempur-Pedic International’s (NYSE: TPX) TEMPUR memory foam is one such product. Originally developed by NASA as an astronaut seat-cushion (as seen here) in the 1970s, the TEMPUR memory foam we’ve all come to love was introduced to commercial markets in 1991. Touted as one of the most comfortable ways to catch some shuteye, the company's stock has historically helped investors sleep at night. All overly predictable euphemisms aside, TPX has been a good investment since the recession, returning 125.7 percent in the past three years.
Since April, however, shares of TPX have been hit hard, falling from the $80 range to a current price near $24 a share. WealthLift’s Sentiment Index has tracked a similar decline, as investors have widely varying opinions on the stock’s future. Now, this decline was the result of a massive guidance readjustment, in which TPX execs revised the company’s quarterly earnings outlook from $0.86 to $0.36 a share. By year’s end, Tempur-Pedic is expecting sales to stay flat around $1.4 billion, after growing its top line by more than 25 percent in each of the past two years. Much of this stagnancy has been blamed on increased competition from Sealy (NYSE: ZZ), Simmons, and Serta, all of which have traditionally relied on coil mattresses for most of their sales. Despite Tempur-Pedic’s best efforts at cost cutting – predominantly in the advertising arena – its analysts are still expecting 2012 earnings to be $2.70 a share, down from 2011’s EPS of $3.18.
Now, from a valuation standpoint, it is possible that the bears may have gotten a bit carried away. At present, shares of TPX are trading at a PE ratio of 7.1X, way below the industry average (20.5X), its own 5-year historical average (16.0X), and competitors like Select Comfort (NASDAQ: SCSS) at 18.4X, Mattress Firm Holding (NASDAQ: MFRM) at 19.7X, Leggett & Platt (NYSE: LEG) at 20.0X, and Sealy at 37.6X. Yes, the company’s earnings revisions were drastic, but this does not mean that shares won’t recover to historically normal valuations over the long-term.
By 2013, analysts are expecting the company to get back on its growth-train, finishing the year with an EPS around $3.00. When this is factored into the equation, TPX looks to have an attractive PEG ratio of 0.6; typically, any figure below 1.0 signals undervaluation. At current levels, Tempur-Pedic’s earnings are trading at a 52 percent discount to those of the S&P 500 Index. Historically speaking, shares of TPX have been held with much higher esteem, having been valued at a 6 percent premium over the past half-decade.
It’s obvious that this underappreciation has to do with the company’s earnings revision, but if it is able to meet 2013 EPS estimates, shares can return to at least a fraction of their previous levels. Using the ’13 EPS estimate of $3.00, fairly valued shares of TPX would eclipse $48 by the end of next year. Even if the stock’s valuation stays depressed by half, it should reach $30 a share. Currently, it trades in the $24 range.
Going forward, Tempur-Pedic still has an advantage in efficiency, sporting operating (23.8%) and net (15.4%) margins much higher than the industry averages of 5.7 and 3.7 percent respectively. At its current valuation, the markets are viewing TPX as a clear straggler in its industry, but these numbers indicate that this is simply not the case. This is still the same company that grew its EPS (59.1%) and cash flows (8.5%) by impressive annual rates since the recession, so it is not fair to completely forget these gains. Such is life in our current market environment however, as investors remain ready to dump their holdings on a whim. Heck, with market forecasts like this one, this attitude is understandable.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. 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.If you have questions about this post or the Fool’s blog network, click here for information.