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

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Tempur Sealy’s (TPX - Free Report) shares have soared over 80% during the last year to crush its industry’s average and the S&P 500. The mattress powerhouse returned to sales growth in 2018 and its expansion looks poised to continue as it proves it’s ready to fight off challenges from digital upstarts through its own direct-to-consumer expansion and more.

The Pitch

Tempur Sealy is one of the world's largest bedding companies that offers everything from mattresses to pillows, under different brands, which include Tempur, Tempur-Pedic, Sealy, Cocoon by Sealy, and Stearns & Foster. The company, which makes over 80% of its revenue in North America, has ramped up its digital and direct-to-consumer business in the Amazon (AMZN - Free Report) age to help better compete against online-based newcomers such as Casper.

Tempur Sealy topped our Q3 earnings and revenues estimates, with adjusted earnings up 28% and sales up 12.5%. Both TPX’s top and bottom line expansions marked the sixth consecutive quarter of growth for the firm, after it saw a downturn between the second quarter of 2017 and Q1 2018.

 

 

 

 

 

 

More specifically, direct channel sales soared 62% to account for roughly 14% of quarterly revenue, up from around 9% during the third quarter of 2018. This strength helped TPX’s gross margin come in at 43.9%, up from 41.1%. “In fact, during the third quarter we recognized the highest gross profit in the company's history, greater than what was generated previously across a larger presence,” CEO Scott Thompson said in prepared Q3 remarks.

“Our double-digit growth in operating income and adjusted EBITDA allows us to continue investing in our plants, products and people, while repurchasing our stock and strengthening our balance sheet by reducing our financial leverage.”

Investors should note that Tempur Sealy recently began new partnerships with Big Lots (BIG - Free Report) and Mattress Firm. The company also opened its 50th Tempur-Pedic retail store in Q3 and management reaffirmed that it could open as many as 150 in the long run.

And one of the firm’s newer offerings, the TEMPUR-LUXEbreeze, recently landed on Popular Science’s Best of What’s New awards list in 2019. The offering helps create a cooler sleeping surface, which could be a hit since the firm claims that “sleeping hot is the number one unmet consumer challenge in the sleep industry -- with more than 60% of Americans struggling with this problem.”

Other Fundamentals

 

 

 

 

TPX stock is up 82% in the past year to destroy its Retail-Home Furnishings Market’s 24% average climb. This group includes the likes of RH (RH - Free Report) , Ethan Allen Interiors Inc. (ETH - Free Report) , and others.

TPX shares are also up 15% in the last three months, but have cooled off recently, which could give the stock some room to run. TPX stock closed regular trading Wednesday at roughly $85 per share. This came in around 8% below its 52-week intraday highs of over $92.

Tempur Sealy’s valuation has become a little stretched on the back of its climb. Still, TPX stock is trading below its three-year highs in terms of forward 12-months sales and earnings. In fact, TPX is trading at 15.1X forward earnings, which matches its three-year median and marks a discount against its 52-week median of 16.2X.

TPX currently holds “B” grades for both Value and Growth in our Style Scores system and rests in the top 9% of our more than 250 Zacks industries. The firm has also returned value to shareholders through buybacks.

Outlook

Looking ahead, our current Zacks estimates call for Tempur Sealy’s fourth quarter sales to jump 14%, with Q1 2020 projected to surge 17.2%. These would both top Q3’s 12.5% sales expansion.

The company’s full-year fiscal 2019 sales are projected to pop 11.5% to hit $3.01 billion. Better still, TPX’s fiscal 2020 revenues are expected to climb 16% above our current year estimate to reach $3.49 billion. Both of these figures would crush 2018’s marginal top-line expansion and mark the company’s strongest sales growth since 2014.

On the bottom end of the income statement, Tempur Sealy’s adjusted Q4 earnings are projected to climb over 31% to $1.18 per share, with Q1 2020 set to soar 63% higher. Meanwhile, its full-year EPS figure is expected to soar 28.4%. And 2020’s earnings are then projected to surge another 46% to $5.55 a share.

Bottom Line

Tempur Sealy has topped our quarterly earnings estimates by roughly 15% in the trailing three periods. Plus, its 2019 and 2020 earnings outlook has climbed significantly since it reported its Q3 results in late October.

Overall, TPX’s recent positive earnings revision trends help it earn a Zacks Rank #1 (Strong Buy) standing. The company’s ability to successfully adapt to the direct to consumer age appears ready to help Tempur Sealy continue to thrive in a business segment that won’t ever go out of style.

Tempur-Pedic landed at No. 1 in terms of customer satisfaction for the retail mattress segment in the J.D. Power 2019 Mattress Satisfaction Report. And consumers are clearly willing to pay for quality when it comes to where they rest their heads at night. This means that investors might not want to sleep on Tempur Sealy stock.

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