Who doesn’t want to enjoy a good night’s sleep? Tempur Sealy International (TPX) provides consumers with this possibility by developing, manufacturing, marketing, and distributing bedding products. It operates through North American and International segments.
Its products include mattresses, adjustable bases, pillows, and other products, and includes brands such as Tempur, Tempur-Pedic, and Sealy.
Given its strong line of products and compelling valuation, we are bullish on the stock.
Tempur Sealy has very strong brand recognition, which is not something easy to do in a competitive industry such as retail. In fact, two of its brands — Sealy and Tempur-Pedic — were the No. 1 and No. 2 best-selling U.S. mattress brands in 2020, respectively. This is undoubtedly a strong competitive advantage that cannot be easily replicated by competitors.
What’s interesting about these two brands is that Tempur-Pedic offers the company’s most premium products, while Sealy is more of a value brand. The fact that Tempur-Pedic is the No. 2 selling brand overall is very good for TPX’s margins, as prices range between $2,399 to $7,999.
Sealy, on the other hand, offers products that range from $299 to $2,799. It’s interesting that it’s the No. 1 U.S. mattress brand because it makes Tempur Sealy a potential hedge against inflation.
As the price of everything increases, average consumers are likely to skip out on mid-range brands and move towards lower-priced options. This positions Sealy well to capture this cohort of customers who have no choice but to scale down.
In addition, it leaves Tempur-Pedic in a prime position to continue servicing the wealthier clientele who can still afford to shop for premium products, helping TPX maintain its margins.
Another potential catalyst for growth is the growth of the company’s direct-to-consumer (DTC) sales. In 2021, DTC sales grew by a staggering 83%. Although this number is likely inflated due to the stimulus injected into the economy during the pandemic, it was still growing prior to the pandemic and is likely to grow going forward, albeit at a slower rate.
This is important because selling DTC provides the company with higher margins. As this becomes a larger portion of overall sales, it could lead to a margin expansion and possibly a multiple expansion.
Dividends and Buybacks
Tempur Sealy currently has a 1.15% dividend yield, which is below the sector average of 1.5%. The company just started paying a dividend in 2021. Thus, there is limited history on its ability to maintain it. Nonetheless, when taking a look at its LTM free cash flow figure of $600 million, its $63-million dividend payment looks safe.
However, TPX has put a lot of capital towards buying back its own shares. In fact, its buyback yield in 2021 was 13.5%. In the past five years, the buyback yield averaged 4.4%.
This has equated to a significant reduction in shares outstanding over the past 10 years. In 2013, the number of weighted average basic shares outstanding was 246 million. In the last quarter, this number was only 191 million. Tempur Sealy expects to repurchase approximately another 10% of shares outstanding in 2022.
Currently, Tempur Sealy has a price-to-earnings multiple of 10.3. Although cheap, investors should never simply look at P/E multiples on their own without considering factors such as growth.
Fortunately, earnings growth for the company is very robust, with analysts expecting an increase in GAAP earnings of 22% in 2022 and another 10.6% in 2023. This implies a forward 2022 earnings multiple of 8.8x and a 2023 multiple of 7.9x, based on EPS estimates of $3.73 and $4.13.
As a result, the current multiple appears to be too low for a company with such high growth and strong brand recognition.
Wall Street’s Take
Turning to Wall Street, Tempur Sealy has a Strong Buy consensus rating, based on five Buys and one Hold assigned in the past three months. The average Tempur Sealy price target of $44.33 implies 35.6% upside potential.
Tempur Sealy has a strong product line that includes the top two selling brands. This gives the company strong brand recognition, which equates to a competitive advantage.
Furthermore, the company appears to be very undervalued, considering it’s expected to grow earnings by double digits while the P/E ratio is in the single digits. Analysts seem to agree with this assessment as well, given their price target that implies 35% upside.
As a result, we are bullish on the stock.
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