Tempur-Pedic Mishaps Present Opportunity For Select Comfort

| About: Select Comfort (SCSS)

Following the Tempur-Pedic (NYSE:TPX) catastrophe, investors have little faith in the mattress making industry, and are selling stock in all companies as a result of their inability to judge its competition. In my opinion, Tempur-Pedic's CEO, Mark Sarvary, should be relieved of his duties, followed by the remainder of his board. Sarvary stated last week that he now expects sales to decline 3-5%, cutting the company's EPS guidance in half and, therefore, cutting the stock in half. In just one day, investors lost half of their holdings as TPX saw more than $1.2 billion wiped from its market cap-- a pretty big jump for a company that was valued at $5.5 billion just two months prior.

The actions of management have not only affected TPX, but also other companies, such as Select Comfort (NASDAQ:SCSS). SCSS has lost 15% of its value since TPX cut its guidance, and more than 30% over the last two months thanks to some weakness in the industry. Yet despite this presumed weakness, SCSS is still expecting to report earnings-per-share between $1.32-$1.40, up from $1.07 in 2011 year-over-year, along with a sales increase of 15%. Besides the fact that both companies sell mattresses, they couldn't be further apart in terms of operations, strategy, and value that is being presented to shareholders.

A popular choice over the last few days has been to buy (cheap) shares of TPX. The stock is trading with a P/E ratio of 7 and a market cap of just $1.50 billion, which is its lowest point since December 2009. Yet the problem isn't the company's current fundamentals, it's trusting the company's management. Sarvary said that the company's competitive environment was changing faster than they expected, but it's still hard to figure how a large publicly traded company couldn't account for such drastic cuts in earnings. The company is now projecting an EPS of $2.70 for the year (who knows how long it will last), which means its forward P/E ratio is closer to 9, a ratio that I consider too high for a company that just cut its guidance 50%.

On the contrary, SCSS has a forward ratio of just over 12, and is still forecasting revenue growth of 15% and significant earnings growth. The stock may be a little more expensive, but in my opinion, it is definitely worth it. Tempur-Pedic blamed much of its problems on North American sales, saying it expects a decline of 8%. To me this is a bit confusing. Does this mean that Sarvary expects sales growth in Europe? I find it interesting that SCSS isn't expecting this decline in North America. In fact, since the company is not exposed to Europe, its 15% sales growth is almost all domestic and, perhaps, maybe it is taking market share from TPX. Also, TPX relies on third party sales where competition is often in the same aisle at a furniture store.

On the other hand, Select Comfort is transitioning to a direct sales approach with its own stores and improved margins. As an investor, the aspect that I feel is most important, and one that actually cannot be measured on a balance sheet or income statement, is the character of management. Some don't have a problem with TPX leaving their shareholders out to dry. If I were investing in this space, I would rather own stock in a company with management that has kept its word, a company with strong growth potential, and a stock that has fallen for reasons that do not relate to the company itself. I would rather invest in Select Comfort.

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

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