A Blind Test For A Growth Stock (TPX)

Feb.23.06 | About: Tempur Sealy (TPX)

We’re going to describe a company and your job is to answer two questions:

1. Is this a good business to own?
2. What range of P/E multiple seems like a fair price to pay?

(We are taking this unusual approach to help readers overcome any biases they might have against the company.)

This company manufactures and markets products which are considered premium in their niche. Not only is there high brand awareness, but the company has a degree of pricing power and accordingly charges premium prices.

Key ingredients in the company’s products are proprietary. The company has several patent and patent applications outstanding to help ward off the competition. Knowledge of the exact formula and manufacturing process is limited to a few individuals.

The company has had strong sales growth for the past few years, up over 40% in 2004 and over 20% in 2005. Net income growth has been similarly strong. Management has expressed its belief that growth will continue, and in public filings has actually listed the ability to meet growth challenges as one of the company’s “Risks.