As is the usual for mattress makers, the market reacted with fury at Select Comfort's (NASDAQ:SNBR) downbeat guidance for fourth-quarter earnings. Management now expects earnings to come in under the low end of previously issued guidance, prompting the market to sell off a solid fifth of the company's total market cap. While analysts wanted $0.21 per share and Select Comfort had thought the numbers would come in no lower than $0.18 per share, the newest projections cast a doubtful shadow over the company's expected double-digit increase in sales and mid-single-digit same-store sales growth. Is this yet another case of market hysteria, or is Select Comfort looking too soft?
It's always interesting that mattress maker stocks react so violently to short-term shifts in demand, as the product itself has a perennial appeal. Moreover, the housing market remains favorable through at least 2015. Those new homes will need new mattresses.
If you take a look at Select Comfort's market performance over the past 12 months, it doesn't look like a surface on which to balance a glass of wine. In January 2013, the stock flirted with $30 per share, only to drop to the low $17s by early March. Things got back to the high $20s by midsummer, and since have fluctuated wildly on a downward trend toward this week's low of near $17 flat. Did the mattress business change so substantially throughout the year as to warrant these swings? Probably not. But this is how the market treats these companies. A look at Tempur Sealy (NYSE:TPX) shows similar volatility, though it has ended up on a far superior note lately (likely related to its consolidation with mattress giant Sealy).
So, do the underlying fundamentals suggest the same level of instability?
Short-term tepidity, long-term stupidity
The previous guidance assumed sales would grow more than 10% and that same-store sales would grow around 5% for the just-ended quarter. Sales are projected to come in around $231 million -- $10 million short of estimates. While it's unfortunate that investors won't see those numbers, what does it say about the long term?
In short, very little. Select Comfort's focus on company-owned stores goes a long way in establishing a brand-to-consumer relationship (for example, we all have heard of a Sleep Number bed).
Long-term demand remains appealing, especially for a company with such significant brand presence and a substantial store footprint both in shopping malls and freestanding stores. On the valuation front, Select Comfort is now at a substantial discount to peers. High-flying Tempur Sealy trades right under 18 times its forward earnings estimates, while Mattress Firm is even more richly valued at roughly 20 times earnings. On an EV/EBITDA basis, Mattress Firm is at 12.17 times, Tempur Sealy trades at 15.76 times, and Select Comfort is just 8.12 times.
Short-term results look more appealing for the more richly valued players, as is to be expected, but Select Comfort's repeated issues (such as misplaced marketing dollars) are very fixable and don't indicate that the company will lag its peers in the long term. At today's price, Select Comfort may be the sector sleeper.