Bedding and mattress manufacturer Sealy (NYSE: ZZ ) made investors restless after releasing first-quarter results last week. Despite the near-term shivers, the stock remains comfortably near its highs for the year. Is it time for Fools to sleep on Sealy?
Sealy's sales during the first quarter rose a respectable 4.3%, but diluted earnings fell due to higher shares outstanding and a more promotional pricing environment, which led to an increase in volumes but lower average selling prices (ASP). Management sees some near-term industry pricing challenges but expects a stronger second half to the year and continued strong growth in international markets.
Sealy has a leading 21% market share in the domestic bedding industry, which is known for withstanding ups and downs in the economic cycle. Consumers don't need mattresses that often, but they are definitely a necessity and wear out over time for some welcome repeat business. As such, Sealy's business is stable and still growing, and stock valuation appears reasonable at under 16 times forward analyst estimates. There are drawbacks to consider, however.
For starters, Sealy returned to publicly traded status in early 2006 after being taken private by an affiliate of private-equity firm KKR in April 2004. KKR still holds an estimated, controlling, 51% stake in the company. As a result, the stock could see selling pressure if KKR decides to sell its position going forward.
Sealy was also brought to market with a high amount of debt on its balance sheet, so interest expense eats up a fair amount of earnings. This leaves less for common shareholders and could exacerbate any business downturns, such as the loss of one of Sealy's top five customers, which collectively accounted for nearly 20% of total sales last year.
The Motley Fool's CAPS community is resoundingly bearish on Sealy and has awarded it a lowly one-star rating. Players see Sealy losing market share to competitors such as Tempur-Pedic (NYSE: TPX ) and Motley Fool Hidden Gems superstar pick Select Comfort (Nasdaq: SCSS ) , and they are also concerned about the company's erratic free cash flow generation, which conflicts with the steady-eddie nature of the industry.
Other worries include the high debt and private-equity affiliation under which the bulk of the public offering proceeds were paid to shareholders just before the IPO occurred. Other portions of the proceeds went to buy out pre-IPO debt holders for premiums to par value.
The reasonable valuation may offset some of the concerns investors have about Sealy. But the company still has some work to do in persuading investors that future results aren't filled with fluff and conflicts of interest between former owners and minority shareholders.
For related Foolishness:
Select Comfort is a four-time
Motley Fool Hidden Gems
recommendation. 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.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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