Tempur Pedic: Despite A Dramatic Revenue Outlook Cut, Shares Offer Value

Jun. 7.12 | About: Tempur Sealy (TPX)

In this time of financial distress and low interest rates, many investors sometimes argue that they should be stacking excess cash under their mattresses. Either the financial world is doing great or those investors are not buying Tempur mattresses as shares of Tempur-Pedic (NYSE:TPX) are being cut in half today.

The manufacturer and distributor of premium mattresses and pillows gave a warning for the second quarter and the entire year of 2012 which led to outright panic as investors all wanted an exit at the same time.

Wednesday's Announcements

Tempur took the market by surprise yesterday morning as it announced that its second quarter sales in North America came in below expectations. In normal circumstances the company does not provide the market with a quarter guidance, but this time the company makes an exemption.

Tempur now expects sales for the second quarter of 2012 to fall between 3% and 5% on the year. North American sales are expected to fall 8% on the year. The guidance for sales implies second quarter revenues to come in between $325 million and $332 million, while analysts were looking for $395 million.

The decline in revenues is having a dismal effect on earnings. Earnings per share are expected to fall 50% on the year around $0.38 vs. analysts expectations of $0.86

CEO Sarvary commented on the developments, "sales trend are below plan due to a change in the competitive environment which includes many new introductions of competitors accompanied by aggressive marketing and promotion". Sarvary remains confident in the long term prospects of the brand and the company's growth potential.

Full Year Outlook

As a result of the disastrous second quarter, the company is forced to adjust its full year outlook as updated in April this year. Full year revenues are expected to come in around last year's level of $1.43 billion versus a previously guided $1.60-$1.65 billion. Earnings per share are expected to come in around $2.70 per share vs. an earlier guided range of $3.80-$3.95 per share.

CFO Williams comments by saying that "in light of the current environment for North American sales, our guidance assumes that North American sales for the third and fourth quarter will each be approximately equal to the second quarter sales factoring in modest seasonality". Williams also noted that the international businesses of Tempur performed well and no changes to those expectations have been made.


Tempur ended its first quarter with $134 million in cash and equivalents and long term debt of $565 million for a net debt position of $431 million. After today's sell-off the market values the firm at a mere $1.42 billion which implies a valuation of 1 times 2012's guided annual revenue and 8 times expected earnings of $2.70 per share. In comparison, the company reported earnings per share of $3.36 for the entire year of 2011.

This valuation multiple compares to a revenue multiple of 1.6 times for competitors Select Comfort Corp (NASDAQ:SCSS) and 1.4 times for Mattress Firm (NASDAQ:MFRM). Both competitors which trade at 19 and 28 times earnings, respectively, lost some 20% after Tempur's warning.

The company currently does not pay a dividend.

Investment Valuation

Shares of Tempur have seen a fair bit of action in recent years. Shares hit a low of $7 in the beginning of 2009 before starting a long term uptrend which resulted in shares hitting the $86 level in April this year. Shares have lost roughly 75% from this point in time in a mere two months on the back of stalling revenue growth for the company overall this year. Furthermore a pricing war in the industry means that fat margins, coming in at 15.5% for 2011, are no longer to be expected in the near term.

While a significant deterioration in the business operations is evident, a 75% sell-off in merely a couple of weeks seems a bit overdone. While I have been cautiously optimistic about the long term prospects of the company after shares fell 21% on their first quarter report, I am more optimistic at this moment. The company's outlook of annual earnings per share of $2.70, value the firm at 8 times annual earnings, and implies a 12% net margin for the year of 2012.

Even if margins would deteriorate further towards 10% in 2013 and revenues would fall 15% to $1.2 billion, the company would still report earnings per share of around $2 per share valuing the firm at 10 times earnings. While the company holds a significant debt position, the valuation is attractive given the strong brand.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TPX over the next 72 hours.