The Best Small Cap for 2007: Tempur-Pedic

The Motley Fool is looking for the best small-cap stock for 2007, and we need your help.

A great starting point
Using our new ratings service, Motley Fool CAPS, as a starting point, I think I've found a contender. I'll tell you what it is in just a minute. But first, let's look at some reasons why it could be not only a good small cap but also one of the market's 10 best stocks.

First of all, it's a five-star stock in CAPS, with 107 out of 108 investors saying it will outperform the S&P 500. That's a ringing endorsement of the kind of company this is. Second, it's a disruptive technology. Think Nucor changing the steel industry. Think Apple changing the way we listen to digital music. Intrigued? Good. But you still have to read a bit more.

The wisdom of crowds
Second, I don't want you to just take my word for it. Here's what our some in our CAPS community are saying.

  • "low p/e, high return on invested capital, good demographics"
  • "better FCF/revenue margin than net margin"
  • "great product, sells itself"
  • "there is a lot of market share to gobble up"

Wow! I think you can agree this company has a lot going for it. Now let's look at its financial performance.

Financial performance
This company is changing the quality of people's lives and generating excellent results along the way. Gross margins have been declining, but operating and net margins continue to rise as the company spreads those costs over more sales. As a result, return on invested capital (ROIC) continues to rise along with cash flow from operations (CFFO).

FY 2002

FY 2003

FY 2004

FY 2005

Gross Margin

53.6%

53.3%

52.7%

50.7%

Operating Margin

16.5%

20.3%

22.1%

22.8%

Net Margin

5.6%

7.8%

11.0%

11.9%

ROIC*

14.5%

13.2%

17.7%

20.4%

CFFO**

$35.0

$47.0

$77.0

$102.2

Margin and CFFO data from Capital IQ, a division of Standard & Poor's.
*ROIC calculated by author.
**CFFO in millions of dollars.

See? I told you this was a good performer.

The secret revealed
So what's the company? Its foam-mattress and -pillow maker Tempur-Pedic (NYSE: TPX  ) . I know what you're saying. "This is the boring mattress industry. Not mini-mills and digital music." Regardless, Tempur-Pedic has staked out its claim in the sleep industry.

Sealy (NYSE: ZZ  ) is the king of the old-school spring technology. Sure, it offers some very nice mattresses, but they still have springs. Who sleeps on springs anymore when you can have a Select Comfort (Nasdaq: SCSS  ) adjustable air mattress to lie on, or something even better, like the soothing comfort of memory foam to help you drift off into a somber slumber?

Is this the stock that's going to be the best-performing small cap in 2007? I think so, and so do 107 investors in CAPS. If you agree, let us know by becoming a part of the CAPS community and entering your "outperform" rating. And if you disagree, that's fine, too. Simply give it an "underperform" rating. All you need to do to be a part of this revolutionary new service is sign up for free. And based on your input, we'll determine the best small cap for 2007 early next week.

For more on sleep technology, check out:

Seen our other contenders for best small cap? If not,click here.

Select Comfort is a four-timeMotley Fool Hidden Gemsrecommendation. To see how this and other small-cap gems from Tom Gardner and Bill Mann can help you sleep better at night, while you know your portfolio is growing, sign up for a free trial.

Retail editor and Inside Value team memberDavid Meierdoes not own shares in any of the companies mentioned. He is currently ranked 211 out of 14,929 investors in CAPS. You can view his TMF profilehere. The Fool takes itsdisclosure policyvery seriously.


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