Tempur Sealy
Tempur Sealy International (NYSE:TPX) is the world’s largest bedding provider, operating in over 100 countries. The company is well-known for their Tempur-Pedic memory foam beds. The company operates with a goal to improve the sleep of people every night.
Annual growth is driven by: Increase in population, natural replacement cycle of mattresses (7-10 years), good health habits – mainstream conscientious society, growth in premium priced beddings, commercial partner growth, marketing strategies, executive incentives.
New CEO
Scott Thompson has a short, but highly impressive record of unlocking value for investors. Thompson helped found Group 1 Automotive, which has since grown into the third-largest dealership group in the US.
In 2008, Thompson was appointed as CEO of Dollar Thrifty Group; at the time the stock was trading at around $1. Through efforts including cost cuts, “re-franchising” and “risk fleet” car management, Thompson not only saved the company but also pushed it to industry.
The largest incentive top level management faces is to increase EBITDA to $650mn in 2017/2018 to receive any type of bonus. A key way Thompson plans to do so is by reducing wasteful jobs. With the acquisition of Sealy in 2012, a number of employees were doing essentially the same job twice.
Additionally, maintaining commercial partners such as Hilton, Sheraton, and Ritz Carlton will be important. In Q1, EBITDA, which is a non-GAAP financial measure, increased 34.4% to $102.0 million as compared to $75.9 million for the first quarter of 2015. This increase is solid proof of EBITDA climbing at a pace that will allow for the firm to hit their 2018 goal.
Opportunity to Steal Market Share
Select Comfort Corporation (NASDAQ:SCSS) is one of the key competitors of Tempur Sealy. SCSS designs, manufactures, and markets a line of air bed mattresses with adjustable firmness as well as foundations and accessories. The company’s products are sold through retail stores located across the United States and through its national direct marketing operations.
SCSS manufactures the Sleep Number mattresses. The company has $1.2 Billion in annual sales, 488 stores, and 3,484 employees. However, Q4 was awful for SCSS (missed sales target by 26%).
Implementation of new Enterprise Resource Planning software lead to huge headaches for SCSS. “At a bare minimum, we think that the delays, missed orders, and negative customer reviews could have a lagging reputational drag on SCSS’s comp growth and make it difficult to achieve SCSS’s sales expectations for the year.”
Earnings
Through 2015, the strong US dollar made it difficult for companies to hit revenue projections and earnings estimates - especially companies in the consumer discretionary sector. However, Tempur Sealy has been very consistent in not falling short on earnings estimates. Later analysis will show why this is great news for a TPX value play.
Q4 earnings call reported that EPS took a .09 hit due to foreign exchange rates. Denmark tax issues resulted in a $61 million settlement and certain international retailers closed, resulting in a $7.7 million charge.
"Shares of the mattress maker declined 11% in early trading. The company signaled that a tax dispute between the U.S.’s Internal Revenue Service and the tax authority in Denmark would cause it to effectively be double-taxed in 2016, potentially cutting into profits for quarters to come. TempurSealy reported a nearly $61 million charge on the continuing tax dispute regarding its Danish business, and Chief Financial Officer Barry A. Hytinen said on a conference call with analysts that the matter could take years to resolve."
"As we have been disclosing since 2008, we’ve had pending income tax assessment from the Danish tax authority related to a dispute over the royalty rate that the Tempur...pays our Danish subsidiary in connection with the use of intellectual property to produce our Tempur Material."
In 2016, Q1 total net sales decreased 2.5% to $721.0 million from $739.5 million in the first quarter of 2015. However, on a constant currency basis, which is a non-GAAP financial measure, total net sales were flat, with a decrease of 1.6% in the North America segment and an increase of 5.9% in the International segment.
With plenty of literature regarding multinational corporations' tough fares in foreign markets, TPX actually had net sales increase abroad from a constant currency basis. Growth in international markets was driven by an increase in net sales of Sealy products in Latin America as TPX continues to expand distribution.
Further evidence that this could be an excellent entry point for a value play over the next few years: As macro trends push dollar strength down, TPX will only get hotter with its counterparts, however, their resilience in times of a strong dollar showcases its stout foundation.
Risks
A high P/E is never attractive. However, a great value investor realizes and appreciates a strong PEG ratio. When a PEG ratio is lower than one (as is with TPX), I believe the validity of growth should be the only concern.
As shown, a strong growth in EPS and incredible incentive to grow EBITDA should be a reasonable case for a handsome PEG. Coupled with the opportunity to increase revenue, steal market share, and sustain corporate partners, one should not be losing any sleep on this value play.
DCF conservative growth metrics reflect lifecycle of mattress products, new management EBITDA incentive, consumer discretionary sector cycles, and cost reductions. Substantial upside exists with a fair price/share of $78.00.