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Bull of the Day: Sleep Number (SNBR)

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Comfort. It’s what we’re all looking for, right?

If you’re like most people, your job has changed. The way your kids or grandkids learn in school has changed. Even a ho-hum trip to the grocery store can be an uncomfortable experience. There’s one place you probably still feel comfortable – your bed.

We’ll get a bit bad news out of the way first. Sleep Number (SNBR - Free Report) products are not inexpensive. During an economic recession when many are unemployed and budgets are strained, consumers stop buying luxury items first. That’s obvious, right?

As clear as it might seem, it’s also not actually correct.

Sleep Number is in a somewhat unique position of providing products that appeal directly to one of the things people are craving most during unsettling times – a good night’s sleep. It’s a tired cliché to describe a conservative investment as, “something that lets you sleep at night,”  but in the case of Sleep Number, it’s true – both figuratively and literally.

This is a demand story.

You’d like your bed firmer? No problem. Softer? That’s fine, too. Warmer, cooler? You can have either. Your partner is snoring and you’d like to give them a nudge but don’t want to wake them up? What if the bed could provide a gentle position adjustment? You have an injury or illness that means you can only sleep well in a specific position? Sleep Number's got that, too.

Founded more than 30 years ago and quickly becoming the first large-scale manufacturer of high-tech pneumatic mattresses, Sleep Number owns 40 unique patents on the technology and dominates the market. Through a network of more than 600 retail locations, direct marketing and internet sales, Sleep Number has made their name basically synonymous with the concept of adjustable sleep technology.

During a pandemic that has changed the way everyone shops, Sleep Number appears to have transitioned seamlessly to a sales model that allows customers to buy what they want online.

Loyal customers support the brand and provide basically free marketing for Sleep Number, using social media to extol the virtues of the company’s technologies and the customizable nature of having your side of the bed exactly the way you like it - even if that partner prefers something much different.

Sleep number isn’t just a compelling story however, it’s also a great business. In the most recent quarter, the Zacks Consensus Earnings Estimate was for profits of $1.01/share and Sleep Number blew it away with a net of $1.79/share.

After hitting an intraday high near $61/share in February, Sleep Number saw its market cap slide by almost 75%, closing at $15.55/share early in April. Fortunately, the worst-case scenario never materialized and those shares are now back at all-time highs.  

Despite the big rally, the company remains a great value, trading at a forward 12 month P/E ratio of just 16X. That’s due in part to a full year 2020 consensus estimate that has risen from $2.76/share to $4.06/share over the past week.

In addition to earning a Zacks #1 Rank (Strong Buy) based on rising earnings estimate revisions, SNBR also gets style scores of “B” in both Value and Momentum, a “A” in Growth and a total VGM of “A”

Though it might not have seemed like an obvious choice earlier this year, Sleep Number has emerged as the supplier of some of the most in-demand goods right now, With a strong balance sheet and excellent (and improving) gross margins, the company that specializes in providing comfort during uncomfortable times can also provide a measure of that same comfort in your portfolio.

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