Sleep Well with Tempur Sealy

05/27/2020 5:00 am EST

Focus: CONSUMER

Tom Bishop

Founder, BI Research

Tempur Sealy International (TPX) develops, manufactures and markets mattresses, foundations, pillows and other bedding products, notes Tom Bishop, growth stock expert and editor of BI Research.

The company’s brand portfolio, arguably “the best overall product portfolio in the market,” includes many highly recognized brands including Tempur, Tempur-Pedic, Sealy (Posturpedic) and Sterns & Foster.

When you see the track that Tempur Sealy was on in Q1 and what COVID-19 did to that and the stock price, you could be forgiven for punching the wall (but don’t, it hurts).

Despite a material impact on Asian business throughout Q1 and revenue dropping off a cliff in North America as March progressed, Q1 revenues increased 19% to $822 million and EPS galloped ahead a whopping 148%. Sweet. So we were headed for a great run with TPX this year.

But then came COVID-19 and the world, especially North America (82% of sales), screeched to a halt. By the end of March orders were down 55% vs. last year. By early April orders were down as much as 80%.

After some gradual recovery, April was down 55%. I’m actually surprised there were any orders. It is worth noting that North American sales were up 25% in Q1. It was Asian sales that dragged overall revenue growth down to 19%.

Financially, the company expects to be operating cash flow positive this year with no debt maturities before 2023 and $197 million of cash (plus $100 million left on its revolver).

Nonetheless, to be cautious and increase financial flexibility as many have done, the Company this past week arranged a $200 million 1-year term loan with a group of banks that will initially go to paying down borrowings against its revolver, thus increasing availability on its revolver to $300 million.

The fact that it was 50% oversubscribed speaks to the banking community’s confidence in Tempur Sealy and its ability to successfully navigate the current crisis and possibly strengthen its competitive position post crisis.

As almost everyone else has done, guidance was suspended until the smoke clears. TPX is a better buy now than when we first recommended the shares back in January.

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