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Bull of the Day: Tempur Sealy International, Inc. (TPX)

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Home prices have started to cool down a bit, but the housing market remains strong as people continue to relocate and reevaluate where and how they live. The pandemic spurred millions to crave more space and update their homes and apartments, which boosted furniture sellers and other home-focused retailers.

Mattress maker Tempur Sealy International, Inc. (TPX - Free Report) benefited from these trends. More importantly, the firm’s sales surged before the current housing boom and sleep is never going out of style.

Stable Business

Tempur Sealy is one of the largest mattress and bedding companies in the world, operating under Tempur-Pedic, Sealy, and Stearns & Foster brands. TPX also offers value-focused private label and OEM products. The Lexington, Kentucky-based company sells mattresses, pillows, and more, and many of its offerings are what many consumers would consider high-end—outside of the super luxury side.

TPX ranked No. 1 in JD Power’s U.S. Mattress Satisfaction Report for the second year in a row in 2020. The firm’s various brands, models, and sizes range in price and much more. The company sells adjustable beds and mattresses that provide cooling and other high-tech capabilities to help provide better sleep. Some of its new offerings even aim to reduce snoring, which can be detrimental to sleep patterns.

TPX, like all retailers, has invested in its digital and direct-to-consumer business in the Amazon (AMZN - Free Report) age to help fight back against any encroachment from digital-focused newcomers and bed-in-a-box firms like Casper (CSPR - Free Report) . Of course, Tempur Sealy also owns its own stores and works with third-party retailers such as Mattress Firm.

Tempur Sealy in early August completed its acquisition of a leading specialty bed and mattress retailer in the U.K. TPX’s purchase of Dreams is expected to “nearly double” sales through its international segment and significantly boost its DTC revenue. Wall Street has shown love for the deal and its blowout second quarter financial results that it reported at the end of July.

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Recent Growth & Outlook

As we quickly mentioned up top, the mattress giant posted strong pre-pandemic growth, with fiscal 2019 revenue up 15% and its first quarter FY21 revenue climbed 19%. Last year’s ideal conditions, driven by home buying and increased home-focused spending, helped its revenue jump 18.5% to reach $3.68 billion

Most recently, TPX’s adjusted Q2 earnings skyrocketed nearly 300% from $0.20 a share in the year-ago period to $0.79 to crush our estimate by 32%. Meanwhile, its revenue soared 76% and its gross margin climbed from 40% to 44.3%. These YoY results were boosted slightly by an easier to compare period in Q2 FY20, but that hardly accounts for the stellar quarter, with revenue up 62% against the pre-covid period.

Executives also boosted its guidance on the back of improved industry conditions and its Dreams deal. Zacks estimates call for TPX’s FY21 revenue to surge 36% in 2021 to reach $5 billion, which is expected to boost its adjusted EPS by 69% to $3.23 a share. Tempur Sealy is projected to follow its 2021 showing with 10% higher revenue in FY22 and 13% stronger earnings.

Analysts quickly and sharply raised their FY21 and 2022 adjusted earnings outlooks, with its consensus estimates up 15% and 14%. The post-second quarter release revisions are part of a continued trend over the last year-plus.

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Other Fundamentals

Along with its growth, TPX executives rolled out initiatives aimed at returning value to shareholders. Last November, the company completed a four-for-one stock split to help make its share price more accessible to a broader swath of investors.

Management also at the time announced plans to initiate a quarterly dividend in 2021 and increase its stock buybacks, both of which it’s done. It paid a $0.07 a share dividend in the first two quarters of 2021 and then boosted its payout by nearly 30% to $0.09 a share for a 0.70% yield.

Given this backdrop, it might not be shocking that TPX stock has skyrocketed 135% in the last year to crush the S&P 500’s 40% and its Retail-Home Furnishings Market’s—includes RH (RH - Free Report) , Ethan Allen , and others—80% run. Tempur Sealy’s impressive streak counited over the past three months, up 30%, while its peers have cooled off to climb 7%.

TPX stock touched new highs of over $50 a share on Thursday and it could experience a near-term pullback since it climbed above overbought RSI territory (70 or higher) at 78. Even though it might be a bit overheated at the moment, the stock still trades at a nearly 20% discount to its industry at 14.0X forward 12-month earnings, which comes in not too far above its own year-long median and 15% under its highs.

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Image Source: Zacks Investment Research

Bottom Line

Tempur Sealy’s positive EPS revisions help it land a Zacks Rank #1 (Strong Buy) right now and Wall Street is rather high on the stock with six of the nine brokerage recommendations Zacks has at “Strong Buys,” with none below a “Hold.” Plus, its furniture space sits in the top 14% of over 250 Zacks industries.

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