Macro forces, combined with excellent company performance, make Select Comfort (SCSS) an excellent stock pick for 2013. This initial article explores some of the macro trends that should benefit this stock.
1. Mattress companies are geared to the economic cycle - According to the SCSS 2011 10-K, the ISPA shows a positive annual average growth of 4.7% for the 20 years ended 2011. This included three down years, the worst of which were 2008 and 2009 (recession years) when mattress shipments in dollars declined 9% each year. So to be clear, if you feel we may go into a recession in 2013, SCSS would not be a great investment choice. However if you feel we are slowly improving and we will not see a recession in 2013, then SCSS should see a supportive market.
2. Housing has bottomed and a continued rebound will help SCSS - Recent stabilization and recoveries in new housing starts and home prices (as reported by Case-Schiller) are a clear sign the effects of the housing bubble are clearing. This means more people will be buying or building a home and a new bed can often be involved with such purchases. More importantly, the wealth effect of increased real estate values should encourage people to spend more money and replace their existing beds. Those of you that have followed the home builders may feel that train has left the station with significant appreciation in these stocks during 2012. SCSS is basically flat at 12/31/12 as compared to the beginning of the year though there was certainly some volatility involved, mostly due to performance issues at TPX and MFRM.
3. Tax clarity - It appears we will have tax clarity for nearly all Americans this month which should remove any overhang on buyers that may have been holding off on a major purchases. This should help build on the momentum already seen in October and November by the ISPA with its Bedding Barometer. This proprietary industry report can be found on certain websites (e.g. Furniture/Today (1)) and shows October and November units at levels of 11 to 12% improvement over the comparable prior year month - a few percentage points higher than the trailing YTD results of about 8.5%.
4. Only two real ways to play mattresses in 2013 - Assuming the merger of TPX and ZZ take place soon, there are only two industry manufacturers that are public and have scale. Tempur-Pedic (TPX) and Select Comfort . There is a third public retailer of mattresses, Mattress Firm (MFRM) that went public about a year ago but they do not manufacture mattresses and significantly underperformed the market in 2012. I do not consider MFRM a good play and they are growing more through acquisition but if you like the mattress space you may wish to examine this company too. While the TPX merger with Sealy (ZZ) is contingent on FTC approval, if this goes through, TPX and SCSS will be in the top 4 of all U.S. mattress manufacturers and the only two that are public so there is limited supply in this play. I like SCSS over TPX as SCSS has no debt, no large acquisition overhang and a more consistent performance than TPX this year and it shows in the two year stock performances between these two companies. More on these two peers in a future article.
5. The renewal cycle is helping - Traditional innerspring mattresses have a recommended replacement cycle of 8 - 10 years and estimated to represent 75% of the 2011 market (1). The market takes a break during recessions so mattress sales were softer in the 2001 - 2003 period and years of 2008 - 2009. This represents half of the last decade. Recent economic clouds have likely caused people to defer purchases. That should make the period of 2011 and forward a strong period for mattress purchases. We have already seen this through the ISPA reports that show double digit unit growth in 2011 and 2012. I think it will continue.
6. Demographics - Boomers and Baby Busters born in the 50s - 70s are reaching points in their life where they can afford a premium specialty mattress. This is reflected in the trends in the mattress industry where specialty mattresses are growing at three times the rate as inner spring mattresses. (2)
So the combination of an improving economy and housing market coupled with fewer mattress plays, tax policy clarity, demographics and the renewal cycle make 2013 the year to invest in a mattress company. I like Select Comfort for a year of strong execution that has not, in my opinion, been priced into the stock.
(1) Industry and Competition page 9, SCSS 2011 10-K.
I am long SCSS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.