Investors Can Sleep Well With Select Comfort

Select Comfort has declined over the past year, but the stock is now trading at an attractive valuation compared to its competitors. Is now the time to buy?

May 29, 2014 at 11:27AM

Select Comfort (NASDAQ:SCSS) has declined over the past year, and now trades at an attractive valuation given its financial position.

SCSS Chart

Select Comfort data by YCharts

Select Comfort's main publicly traded rival is Tempur Sealy International (NYSE:TPX), which is significantly more expensive than Select Comfort based on several valuation metrics. However, Tempur Sealy is levered to a substantial degree and does not have proprietary control over how its products are sold in stores, unlike those controlled by Mattress Firm Holding (NASDAQ:MFRM). Select Comfort, on the other hand, maintains its own stores, similar to Apple, and has control over how its mattresses are delivered and marketed to consumers.

 

P/E

Forward P/E

5-yr. PEG

P/CF

Select Comfort

20

14

0.7

13

Tempur Sealy

36

16

1.3

37

Mattress Firm

29

22

1

15

Data Source: Morningstar & Yahoo! Finance

Select Comfort is a bargain compared to Tempur Sealy and Mattress Firm
Based on earnings over the trailing-12 months, Select Comfort offers the best value compared to Tempur Sealy and Mattress Firm. Tempur Sealy's P/E is almost twice that of Select Comfort, and Mattress Firm's P/E is about one and a half times that of Select Comfort. The disparities are not as wide on a forward earnings basis, but Select Comfort sill offers the best value out of the three; it has a forward P/E of 14 compared to Tempur Sealy's and Mattress Firm's 16 and 22, respectively.

On a forward basis, Select Comfort is also the consensus bargain with a five-year PEG ratio of 0.7. A stock with a PEG of less than 1 is considered undervalued, and Select Comfort certainly fits that bill. Still, Mattress Firm's PEG of 1 gives it a fair valuation, and Tempur Sealy's PEG of 1.3 is not an extreme overvaluation on this basis.

Tempur Sealy does diverge from the other two companies on a cash flow basis, however. Tempur Sealy's P/CF multiple of 37 is quite expensive compared to the other two, coming in at almost three times the P/CF of Select Comfort and about two and a half times that of Mattress Firm.

No debt is a good thing to have
Select Comfort carries zero debt on its balance sheet and still manages to get great returns on equity. In the last three years starting with 2011, Select Comfort has generated returns on equity of approximately 64.6%, 48.3%, and 28.7%, respectively. In the last 12 months, the company generated an ROE of 24.2%. The declining ROE numbers are understandable as the company matures and gets diminishing returns on larger sums of capital.

Tempur Sealy has also generated significant returns on equity over the last three years but has done so by employing a large amount of debt. Its returns on equity over the last three years starting in 2011 have been 280%, 402.3%, and 111.6%. The corresponding returns on capital are much smaller, however, at 39.6%, 14.3%, and about 9.7%, respectively. In the last 12 months, Tempur Sealy has generated an ROE of 104.5% and a corresponding ROC of 7.9%. Tempur Sealy is generating large returns on equity but its returns on capital are falling, an insidious trend for a company with debt. Therefore, an investment in Tempur Sealy is much more risky than one in Select Comfort.

Mattress Firm has also posted respectable returns on equity and capital over the last three years; but it falls short of Select Comfort with smaller returns and by employing debt. In the last three years starting in 2011, Mattress Firm has generated returns on equity of 32.9%, 16.2%, and about 17.8%. The corresponding returns on capital have been 3.6%, approximately 7%, and 9.9%. So, returns on equity have fallen, but the returns on capital have risen; that's a good trend and the opposite of what Tempur Sealy is experiencing.

Foolish takeaway
Select Comfort is the clear value play based on the valuation multiples explored in this article. Moreover, it is a company with a solid financial position, especially compared to its competitor Tempur Sealy, and has generated solid returns on equity without any debt. With control over its operations and an envious financial position, Select Comfort can implement and see through its strategies on vertical as well as horizontal bases. The company has the ability to forge its own destiny and is trading at an attractive valuation with past success.

You can sleep well with a company Warren Buffett is buying too
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Andrew Sebastian has the following options: long January 2015 $20 calls on Select Comfort.. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers