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Mattress Firm Rocked Earnings! Is It Still a Buy?

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Recently Mattress Firm Holding Corporation (NASDAQ: MFRM  ) reported earnings and a forecast that surpassed what analysts expected. In response to this news, shares of the mattress company soared by more than 14% in after-hours trading. Is Mr. Market overreacting to the good news or is it possible that some unbelievable opportunity just made itself available to prospective and existing shareholders? furthermore, how does the Matress Firm compare to Tempur Sealy International (NYSE: TPX  ) and Select Comfort (NASDAQ: SCSS  ) ?

Mattress Firm really delivered!
For the quarter, Mattress Firm pleasantly surprised analysts and shareholders alike. The company reported revenue of $326.2 million for the quarter, 17% higher than the $278.7 million in revenue it reported for the same quarter a year ago. Even though this by itself sounds amazing, what's equally amazing is that Mattress Firm beat the analyst forecasts in regard to revenue by 1.8%.

Before you get your bed sheets in a bunch though, you should consider that most of this amazing growth was not organic but, rather, created through acquisitions. In fact, Mattress Firm's comparable-store sales rose by a far more modest 2.9%. To some, it doesn't matter how a company grows but rather that it grows, period. However, growing too much through acquisitions may expose the company to high levels of goodwill, which could inflate book value and be easily written off to the chagrin of investors should the business falter.

On top of the increase in Mattress Firm's top line, its bottom line looked attractive as well. For the quarter, management reported a 44.8% increase in net income from $12.5 million to $18.1 million. On an earnings per share basis, this translates to $0.53. However, if you factor out acquisition-related charges the company would have had earnings of $0.55 per share, $0.01 more than what Mr. Market expected. This smashed the EPS of $0.37 that Mattress Firm reported for the same quarter last year.

It's not alone!
If you thought that Mattress Firm was the only soft player with hard-hitting results, then think again! During its most recent quarter, Tempur Sealy International (NYSE: TPX  ) smashed analyst estimates. Mr. Market expected the company to report earnings per share of $0.68, which would have been a significant departure from the EPS of -$0.03 that the company reported last year. Tempur Sealy did them one better! For the quarter, the company reported earnings of $0.73 which far outpaced analysts' expectations.

The growth experienced by Tempur Sealy isn't new though. Since 2010, revenue at Tempur Sealy has jumped by 68.8% while its net income rose by 25.6%. This growth took place in part because of the economy coming out of the recession, and also because management ramped up the company's acquisition activities.

This one is though!
Unlike both Mattress Firm and Tempur Sealy, there is one mattress company that has seen some lackluster results this year. For the quarter, Select Comfort (NASDAQ: SCSS  ) saw its earnings per share fall from $0.37 to $0.36. This came as a shock to shareholders, who expected the company to earn $0.43 per share.

Like Tempur Sealy, Select Comfort has seen its business grow tremendously over the past few years. Since 2010, Select Comfort's revenue has increased by 71.8% while its net income rose by 119.4%. This impressive top line and bottom line growth came in second place to none other than Mattress Firm, which saw revenue rise by 133.1% while its net income rose from -$4.7 million to $39.9 million. However, year-to-date, Select Comfort appears to be taking a breather from its high-growth track. This puts the company in a league of its own (in a negative light, of course) as the only one of the three big mattress companies that has underperformed as of its most recent quarter.

Foolish takeaway
As we can see, Mattress Firm's results this quarter are impressive, but not entirely unexpected. Though a huge disparity between last year's results and this year's expected results suggested that a miss was possible, the company still managed to surprise Mr. Market. What's more, its positive surprise combined with Tempur Sealy's earnings beat earlier this year is evidence that the mattress industry is still thriving after its exit from the recession.

The trick from here on out is trying to get a piece of the company at a reasonable price. In the earnings release, management claimed that they expect the company to report earnings per share somewhere between $1.75 and $1.83 for the year. At the company's most recent after-hours closing price of $39.17, this would imply a price/earnings ratio between 21.4 and 22.4. For such a low-margin business, this is a pretty high price to pay so the Foolish investor might want to sit tight and wait for the price to fall or for earnings to rise.

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Related Tickers

12/31/1969 7:00 PM
MFRM $0.00 Down +0.00 +0.00%
Mattress Firm Hold… CAPS Rating: *
SCSS $25.56 Down -0.25 -0.97%
Select Comfort CAPS Rating: *****
TPX $76.47 Down -1.17 -1.51%
Tempur Sealy Inter… CAPS Rating: ***