Will buying TPX let you sleep at night - or make you toss and turn?

August 1, 2018

Will buying TPX let you sleep at night – or make you toss and turn?

Getting a good night’s worth of sleep is important for good health – physical, mental and emotional. I’ve used the same idea throughout my investing career to help guide the investment decisions I make. If putting my hard-earned dollars into a stock is going to keep me up at night, it doesn’t matter what other people, or the market at large think about it – the smart thing for me to do is to move on and find something else. That doesn’t mean that I’m so risk-adverse that I can’t take advantage of opportunities when I see them, but it does mean that the opportunity I do choose to pursue must be clearly superior to the level of risk involved.

Tempur Sealy International Inc (TPX) is an interesting play on that concept, if for no other reason than the fact that a good night’s sleep is what this company is all about. And a quick look at the stock’s chart shows that the stock is more than 27% below its 52-week high, but could be showing some bullish strength right now. Does that mean there is a great opportunity to be had? It’s a little hard to say definitively. There are certainly a number of positives about the business to be seen, including solid earnings growth over the past year, and an improving Book Value. There are also things to be concerned about, like a very high debt level, mostly flat sales, and a narrow operating margin. Ultimately, the value picture is probably in the eye of the beholder, so I’ll outline what I’ve found so far and let you make your own decision.



Fundamental and Value Profile

Tempur Sealy International, Inc. is a bedding manufacturer. The Company develops, manufactures, markets and distributes bedding products. The Company operates in two segments: North America and International. The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the United States and Canada. Its International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. Its brand portfolio includes TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, and Stearns & Foster. It offers its products in over two categories, including Bedding, which includes mattresses, foundations and adjustable foundations, and Other, which includes pillows, mattress covers, sheets, cushions and various other comfort products. As of December 31, 2016, it sold its products across the globe in approximately 100 countries. TPX has a market cap of $5.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings declined by about 15.5%, while sales increased at a modest rate of about 1.5%. The story is similar in the most recent quarter, as TPX saw an earnings improvement of nearly 24% against sales growth of 3.3%. The company operates with pretty narrow margins, as Net Income was about 5% of Revenues for the last twelve months. In the last quarter, however, Net Income relative to Revenues narrowed to only about 3.4%. I take this as a red flag that the company is becoming less efficient despite the acceleration in earnings growth.
  • Free Cash Flow: TPX’s free cash flow is marginal, at only $72.5 million.
  • Debt to Equity: TPX has a debt/equity ratio of 10.8, a very high number that makes them one of the most highly leveraged companies in the Household Durables industry. That is a red flag, however the company’s balance sheet indicates that operating profits are sufficient to service their debt.
  • Dividend: TPX does not pay a dividend.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TPX is $2.90 and translates to a Price/Book ratio of 16.98. The industry average is only 2.9, implying the stock is significantly overvalued. The company’s Book Value was actually 0 until a year ago, but has improved steadily from the end of the first quarter of 2017 until now. The lack of a historical Book Value makes it a little difficult to compare the current Price/Book to anything, however we can also use the stock Price/Cash Flow and Price/Sales ratios in a similar way. The stock is currently trading a little more than 10% below its historical Price/Cash Flow average, and nearly 35% below its Price/Sales ratio. That could put the stock’s long-term target price in the $54 to $65 range, depending on how optimistic you want to be. The absence of useful Book Value information is a concern to me, however and makes me lean more to the conservative side of things, so I have to admit that I have a hard time seeing an intrinsic reason that the stock should be worth more than $54; a 10% upside is a little more limited than I would prefer to work with.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend beginning in January of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has shown some bullish momentum since late April, rising from a trend low of about $41 to the current level; however it has dropped back from a recent pivot high around $54.50 in just the last couple of weeks and is only a couple of dollars below the 38.2% retracement line at around $51 per share. A break above that line would be required to give the short-term upward trend any validation and a real chance to extend further. Otherwise I expect the trading range between about $47 for support and $51 for resistance to hold sway. A break below $47 would mark a short-term trend reversal to the downside and could see the stock challenge its trend low price at $41.
  • Near-term Keys: If you like to work with trend-based, momentum-focused trading methods, look for a break above $51 to confirm the short-term trend’s strength and provide a decent bullish signal to buy the stock or start working with call options. If the stock breaks down, wait for a push below $47 before trying to short the stock or start buying put options.