After a Hard Landing, Is Tempur Sealy a Strong Buy?

On Feb. 7, a day when the S&P 500 index rose more than 1%, shares of Tempur Sealy International (NYSE: TPX  ) declined 5%. In an earnings release made public a day earlier, management announced that the company beat analyst expectations in regards to its adjusted earnings per share. Despite this, and positive growth expectations for its 2014 fiscal year, shareholders were displeased with the company's performance. In light of this recent decline in share price, is the company an attractive opportunity for the Foolish investor?

Results were good... kind of
For the quarter, Tempur Sealy reported revenue of $678.1 million. This was 99% higher than the $341.1 million that management reported the same quarter a year earlier. At first glance, such a rise in sales might seem as though the company is an amazing growth story, but there's a catch.

As opposed to growing organically, almost all of Tempur Sealy's revenue growth from the quarter came from its acquisition of Sealy, a rival mattress company. If you remove the impact of the company's acquisition, its growth for the quarter was only 1%. This suggests that, instead of growing drastically, the business is only inching upward.

In terms of profitability, things are still mixed. For the quarter, the company reported earnings per share of $0.37, $0.02 below what it delivered in the same quarter of 2012. Despite seeing its selling, general, and administrative expenses fall from 22.3% of sales to 20.6%, Tempur Sealy was negatively affected by a significant rise in its cost of goods sold.

As a percentage of sales, the business's cost of goods sold rose from 50% to 59.8%. This was driven, for the most part, by lower margins that stemmed from its Sealy acquisition. After adjusting for miscellaneous expenses, such as integration costs relating to this deal, the company's earnings per share came in at $0.66, 10% above last year's adjusted earnings of $0.60 and $0.03 above forecasts.

But how does Tempur Sealy stack up to its peers?
Based on Tempur Sealy's performance during the quarter, it doesn't look like there's too much to be happy about. But a more important question might be how the company has performed over a longer time frame.  Is this merely a blip on the radar that grants the Foolish investor the opportunity to buy at a discount, or is it more likely than not that this is a sign of mediocrity for the business moving forward?

Looking at the data, we see that Tempur Sealy has had quite a run these past few years. Between 2009 and 2012, the company saw its revenue rise an impressive 69% from $831.2 million to $1.4 billion. As revenue rose, the company saw its net income rise 26% from $85 million to $106.8 million.

While this performance looks strong, it pales in comparison to how rivals like Select Comfort (NASDAQ: SCSS  ) and Mattress Firm Holding  (NASDAQ: MFRM  ) have done over the past four years. Between 2009 and 2012, for instance, Select Comfort saw its revenue rise by 72% from $544.2 million to $935 million. Although this isn't significantly greater than how Tempur Sealy reported, the company's bottom-line growth was phenomenal.

Over this time frame, Select Comfort saw its net income rise a whopping 119% from $35.6 million to $78.1 million. Unlike Tempur Sealy, which was hit by rising costs in relation to sales, Select Comfort saw its jump in costs trail its jump in revenue.

The same kind of situation that lifted Select Comfort had an impact on Mattress Firm as well. Over the past four years, the company's revenue rose 133% from $434.4 million to $1 billion. In that time frame, the company also saw its net income rise from -$4.7 million to $35.6 million.

Foolish takeaway
Based on the data provided on all three companies, it appears as though Tempur Sealy has had a nice run but that it has done so at the cost of higher profitability for its shareholders. In juxtaposition, both Select Comfort and Mattress Firm benefited from rising revenue and net income that outpaced Tempur Sealy's growth.

Moving forward, it's difficult to tell which company presents shareholders with the best prospects because the future is not 20/20. However, if the past is indicative of the future at all, Select Comfort and Mattress Firm will probably grant shareholders better opportunities for value creation than Tempur Sealy.

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