Did you hear the one about the IPO that didn't make everyone rich? No.
Say hello to Sealy (NYSE: ZZ ) .
While the more mainstream media seems to have forgotten about this company after the usual breathless reporting on opening-day price jumps, the stock has in fact been a loser since its IPO in April. It's dropped 14%.
But this week's Q3 numbers give us a chance to take a look at the biz to see whether investors can rest easy. I'm not sure they should be entirely comfortable.
But bedding is boring, so get ready to snore. For Q3, Sealy's sales rose only 6.4%, and net income was up 11.9%. This is pretty much the same thing we saw last quarter, when the numbers were also mind-numbing. To break it down geographically, international sales moved up $18.9 million, or 24.3%, but nearly 5% of the gain was owed to currency fluctuation. At home, net sales increased 2% to $318.4 million, but volume was down 3.7%, with selling price increases of 5.9% making up the difference.
Sealy is the biggest bedding outfit in the biz, but Serta and Simmons, at around $1 billion in annual sales each, are no small players. So competition in the industry is intense, even before you account for upstarts with new technologies, like Select Comfort (Nasdaq: SCSS ) or Tempur-Pedic (NYSE: TPX ) . Management remarked that it's seeing aggressive price moves from competitors, and it's had to follow suit.
I'd also argue that, like furniture peddlers Hooker Furniture (Nasdaq: HOFT ) and Stanley Furniture (Nasdaq: STLY ) , it's exposed to the economics of housing. As we all know, the housing market has cooled, meaning fewer people are swapping up the home chain, and there's less bubble equity to be tapped for big-ticket items like fancy mattresses.
Which way this heads for Sealy is beyond my guess. In the conference call, management discussed figures that seem to indicate the entire bedding industry is headed in the same direction, with stagnant unit sales but rising prices. On the other hand, thinning gross margins were attributed to a higher percentage of foreign and low-end mattresses.
I'd like to point to the improving balance sheet, the reliable cash-flow generation, and the fast growth potential in new products (like all-latex mattresses), and pronounce this company a winner, but I'm not crazy about the price.
Given a normalized free cash flow margin, I estimate that the firm needs to grow cash earnings at a rate of 15% per year in the next half decade to justify the current price of $13.50 per share. I wouldn't sleep easy on that estimate. But give me a crack at this company with the shares nearer $11 each, and I just might toss a few under the bed.
Select Comfort, Hooker Furniture, and Stanley Furniture are recommendations of
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At the time of publication, Seth Jayson had no positions in any company mentioned here, though he does snooze on a Select Comfort 5000. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.
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