Monster Under Tempur-Pedic's Bed

Tempur-Pedic (NYSE: TPX  ) now knows how the other half lives, and it's not pretty.

The maker of beds with the pressure-relieving TEMPUR material saw its shares sink 24% lower on Friday, a day after posting disappointing fourth-quarter results.

The quarter itself was respectable at first glance. Net sales inched 13% higher to $289 million, and profits soared 31% higher to $0.52 a share.

The mattress is lumpier than that, though. The company took a $10.7 million accounting hit in the final quarter of 2006 for the early extinguishment of debt. Operating margins actually contracted during this most recent holiday period, with operating income climbing just 10% higher during the quarter.

Sure, it's still growth, but Wall Street was expecting the company to earn $0.53 a share for the period.

A star is scorned
Tempur-Pedic seemed to be the exception to the rule until Friday's collapse. Rivals like air-chambered mattress maker Select Comfort (Nasdaq: SCSS  ) and innerspring giant Sealy (NYSE: ZZ  ) are hugging their 52-week lows. Tempur-Pedic was growing despite the struggles -- if not at the expense -- of its competitors. Now Mr. Market needs a new darling to rest on. It may not find one in this niche.

Tempur-Pedic is upbeat about the challenging marketplace. It's rolling out new mattresses and pillows this year. It still expects net sales to grow 8% to 13% this year. It sees earnings climbing 17% to 26% higher to between $2.03 a share and $2.20 a share in 2008.

If its aim is true, Tempur-Pedic will be a compelling value at less than 10 times forward earnings. But don't go drooling just yet. The market isn't buying it.

The company claims that it sells products in 70 different countries, unshackling it from the Stateside weakness. It's a big number, but in reality, $725 million of the $1.1 billion in net sales that Tempur-Pedic scored in 2007 -- or 66% -- came from domestic sales. As the United States economy goes, so will Tempur-Pedic.

High-end mattress specialists like Select Comfort and Tempur-Pedic initially succeeded in light of the housing market's meltdown. Their market isn't as cyclical as the homebuilders', since a lot of the mattress market is tied to existing homeowners upgrading and replacing their chunky beds. However, there is no way that the companies can be immune to a weakening economy. If money is tight, old mattresses will have to stick it out a little longer. Consumers will prioritize accordingly, even if the makers market the importance of a good night's sleep as the foundation for a productive day.

This is the same pinch you'll see in housewear retailers like Bed, Bath & Beyond (Nasdaq: BBBY  ) , Limited's (NYSE: LTD  ) Bath & Body Works, and Pier 1 (NYSE: PIR  ) . It will be more pronounced for Tempur-Pedic because many of the store trinkets at least can pass as impulse purchases. Eyeing the company's new $4,000 AlluraBed mattresses won't even be an option for folks counting on the government-sanctioned rebate checks later this year.

Value vs. value trap
This ultimately comes down to who you believe. If you think Tempur-Pedic has a firm grasp of its near-term earnings power, snapping up shares at just nine times this year's profitability is a steal. If you think the market is going to get worse before it gets better, wait for the bottom. Your portfolio will thank you.

Things have changed at Tempur-Pedic. At the very least, Wall Street's perception of the company has changed. Until last week's miss, the company had blown past analyst estimates in each of the nine previous quarters. Topping the pros was as easy as counting sheep.

It's a different game now. The last sheep tripped over the fence it was hurdling. If Tempur-Pedic believes it has what it takes to survive a slowdown by diversifying globally, someone needs to tend to the fallen sheep long enough to pull the wool from Tempur-Pedic's ailing eyes.

Sleep on this:


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  • Report this Comment On January 28, 2008, at 5:12 PM, TheGarcipian wrote:

    Thanks, Rick, for highlighting something that I'd had a feeling about for awhile now. Tempur-Pedic is not tempurrrr-fect. It's only that Mr. Market was late to the party (ahem, again), only recognizing now what the rest of us felt had to be the case. I will stick with holding my SCSS shares until they turn around in the next 2-3 years.

    --TheGarcipian

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