Another Select Comfort Sell-Off, Another Buy Opportunity

Ever-volatile premium mattress company Select Comfort (NASDAQ: SCSS  ) delivered an earnings report this week that failed to impress the Street in a big way. The company missed its estimates on either end, suggesting that things were getting soft (punny, I know) in the mattress world. As a result, the stock took a near 10% hit in Wednesday's after-hours trading, and through into Thursday. Management, however, is sticking to its full-year guidance, and did not find the missed estimates to be as terrible an issue. Does the stock drop create an opportunity for the company, or is the market a prophet of more difficulty to come?

A difficult pick
Keeping a close eye on Select Comfort for a few years has illuminated a few things about the company -- sales seem to swing from great to poor, with little in between; and the stock is tremendously sensitive because of it. The five-year price chart shows near 2,000% gains -- not bad—but since its peak roughly 16 months ago, Select Comfort has been a series of rapid gains and losses. While frustrating for an existing or prospective shareholder, it does suggest that the stock is frequently mis-priced. The question now is, at under $25 per share, has the market undervalued the long-term growth prospects of the company?

Select Comfort is growing both organically and via acquisition. The company is opening many new stores over the course of 2013, and it recently closed its $15.5 million acquisition of competitor Comfortaire. By buying up the smaller players that mimic its designs and technologies, Select Comfort is better suited for taking on its direct peers -- essentially, Tempur Sealy.

Still, the company missed analyst estimates on both the top and bottom lines, coming in roughly $3 million shy on revenue ($207m vs. $210m), and $0.06 short on EPS ($0.18 vs. $0.24). On a year-over-year basis, sales increased while margins dropped, contributing to the larger loss on the bottom line.

The call
The average estimate for full year revenue is $1.36, with $1.66 in the following year -- in line with management's current expectations. This implies a 2013 P/E of around 18x, with a 2014 ratio of under 15.

Over the past two years or so, Select Comfort has traded above 17 times earnings and, typically, somewhere in the low to mid 20s. Part of this is factored into the fast growth the company was experiencing, but the company's growth is by no means over. At under 15 times 2014 estimates, Select Comfort looks to be the least expensive it has been in some time. For comparison, Tempur Sealy is a company nearly twice as large as Select Comfort, at a market cap of $2.67 billion, and trading at a similar forward multiple (13.26).

As mentioned, these mattress stocks are very volatile, and Select Comfort rattled investor's confidence with the sharp drop in profits. But the long-term prospects remain good for the company, with an ongoing housing recovery, and smart, strategic management. Investors should view the current pullback as a possible opportunity

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