Heading Into Earnings, Is Tempur Sealy the Best of Breed?

Tempur Sealy has a strong history of growth. However, it looks like other mattress companies could deliver some fantastic long-term returns.

Feb 5, 2014 at 12:35PM

On Thursday, Feb. 6, Tempur Sealy International (NYSE:TPX) is due to report earnings for the fourth quarter of its 2013 fiscal year. Heading into earnings, investors are right to evaluate the company's prospects and determine whether there is too much risk to hold the stock or, on the other hand, whether now is an ample opportunity to jump in. In an attempt to clarify what Mr. Market is expecting and what the state of Tempur Sealy's financials is, I delved into its historical performance and compared it to peers Select Comfort (NASDAQ:SCSS) and Mattress Firm Holding (NASDAQ:MFRM).

Mr. Market lacks enthusiasm for Tempur Sealy
For the quarter, analysts expect the company to report earnings per share of $0.63. If accurate, this would amount to a mere 5% gain compared to the $0.60 the company earned during the same quarter a year earlier. For the entire fiscal year, the situation is a little more demanding.

During 2012, Tempur Sealy (at the time, Tempur-Pedic, because it had yet to acquire Sealy) reported earnings per share of $1.70, derived from net income of $106.8 million. For the company's 2013 fiscal year, that number is expected to fall 14% to $1.46 per share. However, after assuming the impact of one-time expenses, some of which are attributable to the acquisition of Sealy, analysts expect the company's earnings per share to come in at $2.34 compared to the $2.61 reported in the prior year.

Interestingly, none of this expected decline will likely come from the company's Sealy operations. For the first three quarters of 2013, pre-tax income for Tempur Sealy's Sealy segment came out to $40.4 million while its Tempur North America segment saw its profitability decline by $145.7 million. Unless a drastic reversal is experienced, it's unlikely that the company's bottom line will be anything but helped by the Sealy acquisition. 

A precursor to disaster?
One fear for investors as earnings approach is how a company's peers are performing. The rationale underlying this fear is that how a competitor performs could be indicative of a general trend in that industry. Heading into earnings, this is of particular concern for investors in Tempur Sealy, because the preliminary earnings that rival Select Comfort reported earlier this month were far from ideal.

For the quarter, Select Comfort brought in revenue of $231 million. While this represented a nearly 5% rise over the $220.6 million the company reported the same quarter a year earlier, it was shy of the $242.6 million analysts expected. Despite having a strong quarter, the company experienced lackluster sales that began with Cyber Monday and extended through the end of December.

On an earnings basis, Select Comfort previously believed that it would bring in $0.18 to $0.26 per share for the quarter. In its preliminary release, management stated that it will likely report somewhere in the lower range of its expectations because of the revenue shortfall. This could provide some headwind for Tempur Sealy heading into its results and could imply lower future expectations for it and other competitors like Mattress Firm.

But how does Tempur Sealy stack up in the long run?
Over the past four years, Tempur Sealy has demonstrated a strong capacity to grow. Between 2009 and 2012, the company's revenue rose 69%, from $831.2 million to $1.4 billion. In this time frame, it saw its net income rise 26% as revenue rose but was offset to some extent by rising costs.

At first glance, this kind of growth rate looks great (and it is!) but the company's performance is actually the lowest of its peer group. Select Comfort, for instance, grew slightly faster over this time horizon, increasing its revenue by 72%. Unlike Tempur Sealy, though, the business was able to keep costs depressed. In that four-year time span, the company's net income rose 119%, from $35.6 million to $78.1 million.

Mattress Firm's performance was even better. Between 2009 and 2012, Mattress Firm saw its revenue jump 133%, from $434.4 million to $1 billion. Not only did its top-line performance leave its peers in the dust, it's profitability did, too. Over this time frame, the company saw its net income rise from negative $4.7 million to $39.9 million as it benefited from rising sales and greater cost efficiencies.

Foolish takeaway
Heading into its fourth-quarter report, analysts aren't terribly enthusiastic about Tempur Sealy's prospects. While it is possible that the company could surprise and send shares soaring, it's not wise to gamble on a company's earnings release. Rather, the Foolish investor would be wise to assess the value of each of these companies and determine which is likely to offer the best long-term prospects.

At a brief glance, Mattress Firm's growth looks like it could create amazing value in the long run, but the 8% net profit margin generated by Select Comfort is slightly higher than Tempur Sealy's and more than twice what Mattress Firm can deliver. Using this logic, combined with the fact that Select Comfort is trading at half the P/E ratio of Mattress Firm and one-third that of Tempur Sealy, makes Select Comfort a difficult company to pass up.

Tempur Sealy and its competitors are fast-growing businesses. But are any of them fit to be classified as one of the Motley Fool's six picks for ultimate growth? The Fool's David Gardner has proved skeptics wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of Tempur Sealy 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers