Motley Fool Hidden Gems
recommendation Select Comfort
Analysts expect Select Comfort to compound earnings at a 23.5% annual clip for the next five years. That's more than double the S&P 500's expected growth, and it comes to barely 20 times trailing earnings. There's excellent growth expected, and you don't have to pay an inflated price to get it. That's comforting.
For context, try this: Select Comfort will grow earnings twice as fast as Microsoft
The balance sheet shows $58.8 million in cash ($1.63 a share) and no debt. The return on equity is an extremely healthy 28.9%. Oh, and don't overlook the $31.8 million in trailing free cash flow on the income statement.
Why say more?
Ah, my bearish opponent will certainly try to spin tales to disrupt the restful night's sleep that Select Comfort investors should have dialed in. So let's look deeper.
In September, the company updated its business outlook for the third quarter. It noted that its long-term targets are 15% to 20% sales growth and 20% to 25% earnings growth. That's great, but notice this: "We are currently on track to exceed those long-term targets, both in the quarter and for the full year." Cozy, isn't it?
The company likes its prospects and has been using its cash reserves for, as it puts it, "aggressively and opportunistically pursuing stock repurchases over the last several months." That will also help boost long-term earnings per share.
Radisson Hotels' installation of Sleep Number beds in its U.S., Canadian, and Caribbean hotels also makes sense. For now, the hotel gets a unique offering to drive bookings, while Select Comfort gets a way for potential customers to "sleep on it."
The Sleep Number bed is a proprietary product that has become an established brand. Its market share is less than 6% nationally, so there is plenty of room to grow at home and abroad.
A dark cloud
Recent Gulf Coast hurricanes have disrupted the supply of foam used in Select Comfort mattresses. The company says that it expects that shortage to result in delayed deliveries for some customers at the beginning of its fourth quarter.
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Obviously, Select Comfort has implemented contingency plans. It's also reasonable to assume that new supplies of foam will increase the company's costs. But remember, earnings were trending above objectives for the third quarter.
Let's assume that the fourth quarter is disrupted early and earnings hit $1 a share for the year, the low end of previous guidance. That leaves the stock trading at 17.9 times forward earnings. That, sleepers, is value territory -- and the foam shortage is a short-term problem.
Dark cloud No. 2
Growth is slowing! Call out Chicken Little to deliver the message.
It doesn't take a rocket scientist to discover that over the past five years, Select Comfort grew earnings at 39.1% annually. That's fast growth. It makes projected growth of 23.5% annually look downright slow. But don't be fooled by appearances. There is solid growth here, and it comes at a reasonable price.
Add it up
This stock isn't hard to understand. Expected 23.5% annual growth is valued at only 17.9 times this year's forward earnings. There is no debt, the free cash flow is flowing, and the company likes its stock so much that it's buying it back. That's bullish -- plain and simple.
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Wait! You're not done. This is just a quarter of the Duel! Don't miss Seth Jayson's bearish beginning, Seth's rebuttal, or W.D.'s final word. When you're done, you're still not done. You can vote and let us know who you think won this Duel.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
