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Tempur-Pedic: Free Fall In Stock Creates Buying Opportunity

 May 09, 2012 12:36 PM

(By Mani) Shares of Tempur-Pedic (NYSE:TPX) have fell 44 percent over the past three weeks following the company's announcement of the first quarter results on April 19. The mattress maker did not meaningfully exceed expectations on either the top or bottom lines and merely reaffirmed its full-year guidance. This was a stark contrast to the "beat and raise" pattern that investors have grown accustomed to over the past two years.

However, the key reason for the negative investor sentiment was management's commentary regarding the influx of new entrants into the specialty mattress category, particularly at the low end of the premium segment, and the near-term impact it had on the market share.

The company's net income for the first quarter rose to $56.2 million, or 86 cents a share, from $48.3 million, or 68 cents a share, in the prior-year quarter. Net sales for the first quarter increased 18 percent to $384.4 million. Analysts, on average, polled by Thomson Reuters had been expecting earnings of 84 cents a share on revenue of $384.53 million.

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Tempur-Pedic confirmed its full year 2012 outlook with earnings still expected in the range of $3.80 to $3.95 per share and net sales in the range of $1.60 billion to $1.65 billion. Analysts currently expect $3.95 a share for the year, with revenues of $1.65 billion.

The stock seemed to have stabilized a bit, until this past Monday when word spread–first through a sell-side research note and later confirmed by the company that it is planning to run a promotion on the Cloud Supreme, its best selling mattress, from May 16 through July 8. This is a US promotion and will feature a discount of 12-17 percent off the suggested retail price of a queen set, currently $2,999.

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"This does mark a departure from the company's prior strategy, which has been adamantly opposed to promotions and discounting on mattresses (with the exception of discontinued models). However, after finally having the opportunity to speak with the company, we came away from the conversation reassured that this is not as dramatic an event as the stock's reaction would indicate, and therefore creates a buying opportunity," Oppenheimer analyst Joseph Altobello wrote in a note to clients.

The analyst learned that this promotion was pre-planned and not a response to either heightened competitive activity or  acceleration in market share losses. The promotional discount was already baked into the company's outlook, which it reaffirmed less than three weeks ago and incorporates gross margin expansion of up to 200 basis points this year.

Further, this kind of promotion is new to the company, particularly around industry holiday discounting events, when it has historically been an observer rather than an active participant.

"We understand that investors have grown increasingly skittish of late, particularly within the consumer discretionary arena. That said, we find it very hard to believe that mattress industry dynamics have changed all that dramatically in such a short period of time, or that the Tempur-Pedic brand no longer carries cachet with consumers," Altobello said.

Meanwhile, the stock is trading at 13.3 times the analyst's realistic 2012 estimated bear-case EPS of $3.50, still an attractive multiple given the company's very healthy long-term growth prospects. Excluding the bear case, the company's stock is trading at 11.8 times the Wall Street consensus earnings forecast, implying it is still attractive given its strong fundamentals.

"That said, given the recent sell-off, this still implies very nice upside from current levels, and so we would be buyers on this pronounced weakness," said Altobello, who has an "outperform" rating and $75 price target on Tempur-Pedic shares. Shares of Lexington, Kentucky-based Tempur-Pedic have dropped 25 percent in the last one year and 16 percent year-to-date. The stock were trading at over a 5-month low on Monday. They have been trading between $44.50 and $87.43 during the past 52-weeks.



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