Small Cap Expert Sleeps well with Tempur Sealy

01/31/2020 5:00 am EST

Focus: CONSUMER

Tom Bishop

Founder, BI Research

For a while now, Tempur Sealy (TPX) has popped up in a lot of the quantitative screens that I run — and I just ignored it because, well, it’s a mattress company, asserts Tom Bishop, small cap expert and editor of BI Research.

I like a stock with a little more … pizazz. But, alas, 10 years into this bull market stocks with pizazz that haven’t been bid through the roof are hard to find.

With nothing sexier grabbing my attention this time and Tempur Sealy’s numbers looking pretty good frankly, I decided to at least take a closer look.

Now, here are some things to like about this company. First is that 45% EPS growth forecast for 2020 (and that’s the consensus of 11 analysts), and the fact that that’s not because its bouncing back from a bad year.

And this isn’t just a flash in the pan. Earnings are forecasted to grow a very healthy 24% in 2021, plus the 3-5 year growth rate is pegged at 26%.

Then there is the PE. At 15.6 times 2020 projected EPS, the PE to growth rate (PEG) is a remarkably low 0.6 (15.6 / 26). This is a cornerstone of the BI Research investment philosophy — Growth at a Reasonable Price.

I like to see the PEG near 1 or better and 0.58 is waybetter, indicating investors have not caught up to the bright prospects here.

The company has begun a new relationship with Big Lots and Mattress Firm in North America; during Q3 they completed the rollout of Sealy products at Big Lots and in Q4 they began shipping products to Mattress Firm.

Recently enacted anti-dumping duties against China manufacturing benefited all U.S. bedding manufacturers, another plus here. I should note that the company manufactures its mattresses almost exclusively in the U.S. with one plant in Denmark supplying the European market.

The company opened its 50th Tempur-Pedic retail store in Q3 and expects to open a couple more in Q4. Ultimately management envisions 125 to 150. Stores open more than a year had very strong same store sales, up over 20%.

Interesting to note, the direct to consumer online channel is a thing here and saw double digit growth — andit’s profitable. The company has $1.7 billion of debt, but its EBITDA covers interest 6.6 times over. Bottom line, TPX is an intriguing buy.

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