Ljupco/iStock via Getty Images

Ljupco/iStock via Getty Images

Are you sleeping on Tempur Sealy (NYSE:TPX ) ? One of the largest designers, manufacturers, distributors, and retailers of bedding in the world, has seen incredible growth over the past few years due to increased world demand. The company has been able to maintain costs, grow margins, and make acquisitions. Even if bedding demand were to completely rescind back to 2017 levels, Tempur Sealy trades at a fair price level per the pre-growth period.

Tempur Sealy Revenue (SEC.gov)

Tempur Sealy Revenue (SEC.gov)

Tempur Sealy Revenue Breakdown (SEC.gov)

Tempur Sealy Revenue Breakdown (SEC.gov)

As can be seen above, Tempur Sealy has been seeing increased growth over the last three years. This double-digit growth has been powered by broad-based demand, as well as strategic company moves. In 2019 the company launched the Stearns & Foster product line, expanded its distribution channels, and increased the retail footprint. The results of these actions have certainly helped the business these past few years. The effects of this broad-based demand can be seen across the board, with the North America segment seeing total growth of 91% since 2018 and International seeing 50%. Looking at the wholesale versus retail growth shows how the expanded distribution and retail stores have benefited the company. Direct sales grew by 55%, 25%, and 82% each year, while wholesale sales grew 11%, 17%, and 27% per year. Overall higher demand has increased revenue over the past few years, but Tempur Sealy has also made great moves to enhance its market strength.

Tempur Sealy Operating & Net Income (SEC.gov) Tempur Sealy Margins (SEC.gov)

Tempur Sealy Operating & Net Income (SEC.gov)

Tempur Sealy Margins (SEC.gov)

As revenue has jumped, so has operating and net income. Operating income has seen a CAGR of 25.2% since 2018, while net income has grown at a clip of 32.9%. Looking at margins shows Tempur Sealy has held costs steady and improved operating and net margins by 7.5% and 7.1%, respectively. Overall, the past three fiscal years have been great for the business, and Tempur Sealy is capitalizing on it with great strategic moves.

Looking at the first quarter of 2022 shows no slow down. Tempur Sealy posted year-over-year revenue growth of 18.7%. North America segment grew 5.5%, while the international segment grew by 98.6%. The large growth in International is due to the acquisition of multi-branded retailer Dreams. With this acquisition, the company has pushed harder into retail locations, and the direct revenue this quarter grew by 94%. The gross margins also declined by 1.8%, but the company saw flat operating and net income. This was due to increased SG&A coinciding with the refresh of the Sealy portfolio in North America and the launch of Tempur in Europe/Asia. Overall, it may seem that growth and demand are still prevalent.

Tempur Sealy's balance sheet is just alright compared to the exciting growth of the business over the past few years. The business has good liquidity with current and quick ratios of 1.21x and 0.63x. But on the other hand, Tempur Sealy has high leverage with a negative stockholder equity and $4.4 billion in liabilities on the books. The company has a good times interest earned right now at 13.8x, but if demand were to fall back to 2019 levels, the company would have closer to a 5.2x ratio. Overall, nothing to harp on here but there is room for improvement.

As of writing, Tempur Sealy trade around the $27 level. At this level, the company trades at a P/E of 8.8x. This is very low, but it is unlikely that bedding demand remains this higher over the long run. If we use the low EPS of $1.82 from 2018, the P/E would be 14.8x. Either way, the company has a very fair valuation and offers a small dividend to boot. Overall, the company seems to be on par with fair value.

The main risk that could be key to an investment in Tempur Sealy is a falloff in demand of bedding products. Bedding is not a high turnover product, customers buy a mattress to use for about a decade. Therefore, it could be expected that this high level of demand is to fall off at some point as the market saturates as people buy their new mattress or replace their old one. But even if this is to happen, the valuation currently presented offers a nice margin of safety. Also, this just doesn't seem to be the overall trend stated by the industry. Tempur Sealy has stated that consumer have shifted spending habits to in-home purchases, which has been accelerated by the pandemic. There are reports that the industry will also keep growing at over 5% per year due to strong growth new bedding styles, growing hospitality industry, and increased spending in developing countries. And Tempur Sealy has put itself in a great spot to capitalize on these trends. Overall, it doesn't seem as if bedding growth will disappear suddenly, but even if it does the valuation of Tempur Sealy would still be very fair.

Altogether, Tempur Sealy has seen great demand and growth since 2018. While much of this growth is due to just higher demand for bedding, the company has made some key strategic moves like opening more retail locations and expanding distribution which has also expanded growth. The price point at which Tempur Sealy is trading offers a margin of safety that even if demand for bedding were to disappear would still be very fair.

This article was written by

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