Is Tempur-Pedic the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Tempur-Pedic (NYSE: TPX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Tempur-Pedic.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.5% Fail
  1-Year Revenue Growth > 12% 25.4% Pass
Margins Gross Margin > 35% 52.7% Pass
  Net Margin > 15% 15.4% Pass
Balance Sheet Debt to Equity < 50% 563.9% Fail
  Current Ratio > 1.3 2.56 Pass
Opportunities Return on Equity > 15% 183.8% Pass
Valuation Normalized P/E < 20 6.96 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With six points, Tempur-Pedic looks like a promising prospect. But the stock has taken a pounding recently, having lost nearly three-quarters of its value just since April.

Until recently, the entire bedding and mattress industry looked like a gold mine. Established stalwart Select Comfort (Nasdaq: SCSS  ) had used its well-controlled distribution channels to produce strong sales growth of around 31% in 2011 versus the previous year, while Tempur-Pedic almost matched that pace with a 28% boost in annual revenue. Newly public Mattress Firm (Nasdaq: MFRM  ) experienced even faster sales growth, with shares doubling only months after its November IPO.

But then things started going wrong for Tempur-Pedic. In April, the company gave full-year 2012 earnings guidance that disappointed analysts, triggering a 22% slide in the stock. Then, earlier this month, Tempur-Pedic drastically cut that guidance, shaving $1 off its previous EPS forecast. Disappointing results from Mattress Firm pushed it down as well, although more conventional mattress company Sealy (NYSE: ZZ  ) has actually held up reasonably well by comparison.

A slowing economy definitely plays into the bear case for Tempur-Pedic. Furniture maker Leggett & Platt (NYSE: LEG  ) has risen and fallen along with sentiment about the U.S. economy, with early optimism about an improving housing market more recently giving way to concerns about a slowdown. The same trend affects mattress makers as well.

Where Tempur-Pedic will go from here depends on its business performance. As Fool analyst Anand Chokkavelu notes, if management is just being conservative in its forecasts, then the stock could easily soar once those results come out. But if there's a real problem, then it could be a while before Tempur-Pedic starts to improve toward perfection. As for me, I'm voting for the bullish value case by making a positive CAPScall on Tempur-Pedic.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Tempur-Pedic may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Tempur-Pedic to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Tempur-Pedic. 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 Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

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  • Report this Comment On June 22, 2012, at 1:43 PM, Teacherman1 wrote:

    Not the perfect stock, but worth a shot as a "spec" play.

    Bought just a few shares today to see how it plays out.

    That was an unbelieveably huge "dump" on the 6th, and now every "under employeed" law firm in the country is trying to put together a class action suit.

    I like to take every opportunity to bet against the lawyers.

    Not my usual type of stock, but not risking a lot to see if I can "catch the wave".

    They have been a good company that suffered from the economic downturn, and imo made a mistake by trying to "out discount" the other guys.

    It will be interesting to watch.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On July 10, 2012, at 12:52 PM, 2jimy3 wrote:

    this report started with, is scss a perfect stock, it looks lick you used sccs to get investers to read many pages off other stocks. I do not mind reading other infomation on other stocks, but you do this all the time. why can't you give the informathin on the stock that you list first then go other stocks

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