Tempur-Pedic: Sell-Off Provides Investors With Buying Opportunity

| About: Tempur Sealy (TPX)

Shares of Tempur-Pedic International (NYSE:TPX) fell almost 21% on Friday after the manufacturer of mattresses and pillows missed "whisper" numbers for its first quarter results and failed to raise its guidance for the remainder of the year.

First Quarter Results

Tempur-Pedic reported net income of $56.2 million or $0.86 per share compared to $0.68 in the first three months of 2011. Revenues increased 18% to $384.4 million with steady demand in both the US and international markets. While the headline earnings per share number of $0.86 was ahead of analyst consensus of $0.84, it failed to beat the "whisper" numbers.

Gross margins improved 130 basis points to 53.6% on increased efficiency in the production and distribution, while operating margins fell 70 basis points to 22.4% due to increased strategic investments mostly related to increased advertising efforts to increase brand awareness.

CEO Sarvary commented on the release, "In the first quarter we delivered solid financial performance, enhanced our product range with the introduction of TEMPUR-Simplicity and increased our investment in advertising by 37% to $47 million. We are excited about the rollout of our new dealer programs beginning in the second quarter."


Tempur-Pedic reaffirmed its full year 2012 outlook. The company expects sales between $1.60-$1.65 billion and earnings per share in the range of $3.80-$3.95. Analysts expected the company to raise the guidance range for the second time this year, which the company failed to do. The consensus estimate among analysts was that Tempur would raise its earnings per share outlook to $3.97


Tempur-Pedic ended the first quarter with $134 million in cash and equivalents and $565 million in long term debt for a net debt position of $430 million. After Friday's sell off the company is valued at $4.25 billion which represents a 3.0 times annual revenue multiple and 20 times 2011's earnings. This compares to a revenue multiple of 2.3 times and an earnings multiple of 26 times for competitor Select Comfort Corp (SCSS).

The company only repurchased some $12 million in shares during the fist quarter with $238 million still available under the current authorization. Strong cash flows during the quarter led to a $43 million reduction in the net debt position, which is necessary as the company is still heavily indebted.

Investment Thesis

Long term shareholder in Tempur-Pedic have seen a great run. Trading as low as $7 in the beginning of 2009 shares have seen a steady upwards trend to peak at $87 in April 2012.

Despite ending the day down 20% on Friday, shares are still up 27% on the year. The guided outlook for the full year of 2012 implies a valuation of 2.6 times annual revenue and 17 times earnings.

Margins have expanded years in a row to an incredible 15.5% in 2011, which leaves little room for further expansion. As such revenue growth (projected at 15% for 2012) is the main driver for future profitability. With valuation metrics based on the 2012 outlook being in line with the general market, investors seem to have overreacted a bit on Friday providing long term investors with an interesting entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.