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Tempur Sealy International, Inc. (NYSE:TPX ) is one of the world's largest mattress manufacturers with a portfolio of several leading brands. The company recently reported its latest quarterly result, highlighted by solid growth and profitability despite challenges from global supply chain disruptions. Still, shares have been in a painful selloff, down nearly 50% from their high in 2021 amid the broader market volatility.

Recognizing the challenging macro environment, we like TPX at the current level supported by an attractive valuation and overall strong fundamentals. Importantly, there is a defensive aspect to the mattress and bedding industry which historically has been resilient in economic downturns. The company's effort to expand its global footprint can generate shareholder value going forward.

The company reported its Q1 earnings on April 29th, with GAAP EPS of $0.69 which beat expectations by $0.10 and was also up 11.2% year over year. Revenue of $1.2 billion climbed 19.2% y/y and was also $40 million ahead of estimates.

The story here was that even with Q1 representing a record quarterly performance for the company, the trend lower in margins along with softer forward guidance from management largely explains the weakness in the stock. The gross margin this quarter at 42.2% declined from 44% in the period last year with management citing operational inefficiencies. Similarly, the operating margin at 15.2% fell from 18% in the period last year following the theme of inflationary cost pressures outweighing pricing initiatives.

Approximately 70% of sales are from within North America which climbed 5.6% y/y. The smaller international segment led growth, up 92% y/y to $333 million related to the impact of the company's 2021 acquisition of U.K.-based "Dreams" a specialty mattress manufacturer. The deal was strategic to accelerate the company's growth in Europe with a direct to the consumer profile while also enhancing global logistics capabilities.

While the top-line momentum was positive in Q1, the company issued a press release at the end of March noting softer trends through the second half of the quarter citing falling consumer confidence as a fallout from the Russia-Ukraine geopolitical crisis. This served as a prelude to a revision lower in estimates this quarter.

Tempur Sealy now expects full-year adjusted EPS between $3.20 and $3.40, compared to the prior midpoint target closer to $3.75. The company now sees full-year revenue growth trending around 10% compared to a stronger 15% and 20% figure cited in the Q4 earnings release.

Notably, the company still intends to move forward with a plan to repurchase around 10% of shares outstanding through 2022 as part of its capital allocation plan. In February, TPX hiked its quarterly dividend rate to $0.10 which yields 1.5% on a forward basis.

The annualized payout represents around $75 million compared to $116 million in cash on the balance sheet at the end of Q1. Over the past year, TPX has generated $1.1 billion in adjusted EBITDA and around $550 million in free cash flow. We view the dividend as well supported by underlying financials.

We mentioned TPX has been in a deep selloff with shares currently back to a level first reached in early 2020, before the pandemic. The more volatile outlook including a trend of softer margins and weaker guidance has worked to pressure sentiment towards the stocks. That said, it's important to keep in mind that the underlying financials here are still strong and the company maintains a positive long-term outlook.

TPX benefits as a global leader in a segment of consumer products that is technically classified as "discretionary" but also captures some staples and defensive components. The case for mattresses is the idea that it represents a home furnishing essential, with consumers regularly needing a replacement or new set for any number of reasons.

By this measure, the understanding is that the demand trends for TPX have some underlying support beyond the economic cycle. The company operates through brands at various price points between budget options up to specialty luxury lines. Even if consumers are getting pinched because of high inflation, TPX can capture substitution into cheaper bedding alternatives.

According to consensus estimates, the forecast for 2022 between revenue at $5.44 billion, up 10% y/y, and EPS of $3.27 are in line with current company guidance. Looking ahead, the outlook is for steady growth in the mid-single-digit range while earnings can rebound higher with normalizing margins to the upside getting past the supply chain disruptions.

The silver lining to the stock market selloff and correction in TPX is that valuations have been reset lower. We highlight that shares are trading at a forward P/E of just 8x, which is nearly half the stock's 5-year average for the multiple closer to 19x. On an enterprise value to EBITDA basis, TPX trading at 7x is also well below the decade average for the stock closer to 13x. In other words, TPX is undervalued and cheaper than it's been in a long time.

We rate TPX as a buy with a price target for the year ahead at $34.00 representing a 10x P/E multiple on the current consensus 2022 EPS. Our thinking here is that the selloff has gone too far, setting a low bar of expectations that the company is well-positioned to outperform. In our view, TPX deserves a higher valuation premium given its market position and positive long-term outlook. Getting through the next few quarters, stabilizing margins and steady sales should allow the stock to reprice higher.

In terms of risks, the stock remains vulnerable to macro headlines related to trends in consumer spending and broader economic growth. Further revisions lower to guidance or disappointing sales trends can force a reassessment of the long-term earnings outlook. Expect volatility to continue over the near term but we view the current level and any downside as a buying opportunity.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TPX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.