As recently as a few months ago, Wall Street heralded Tempur-Pedic (NYSE:TPX) as the leader in the specialty mattress industry. Fueled by robust demand for its space-age mattresses, Tempur-Pedic enjoyed several consecutive quarters of strong sales and earnings growth. However, last week brought devastating news for the company, and the stock lost nearly half of its value in a single day! How did this happen? Let’s find out.
Tempur-Pedic specializes in the science of sleep. After all, their patented Tempur material started out as NASA technology. The original creation was a labor of love; Swedish scientists spent millions of research dollars and nearly 10 years perfecting the pressure-relieving material. Even though the material was created in the ‘80s and Tempur-Pedic has been selling its products across the globe since the early ‘90s, the concept is still revolutionary.
Tempur-Pedic is the worldwide leader in specialty sleep and the fastest-growing segment of the estimated $13 billion global mattress market. Its mattresses are consistently ranked as Consumer’s Digest Best Buys, and they have won the coveted Good Housekeeping Seal of Approval.
In addition, Tempur-Pedic mattresses are the only ones to have earned the Arthritis Foundation’s Ease-of-Use Commendation.
There are currently 96 companies in the Home Furnishing and Fixtures industry; of these Tempur-Pedic ranks at No. 11 in terms of market capitalization. Tempur-Pedic claims the top spot for having the highest return on equity. This company also ranks highly in terms of long-term growth rate (10th), Price/Earnings to Growth ratio (12th), sales growth (13th) and earnings growth (16th).
Tempur-Pedic’s main competitor is Sealy (NYSE:ZZ). Between the two, Tempur-Pedict enjoys higher sales growth, gross margin and operating margin.
Last Wednesday, shares of TPX plunged 47% after management slashed the company’s full-year sales and earnings guidance. Due to increasing competitive pressures in the specialty mattress market, the company expects sales to be flat in 2012, coming in at around $1.43 billion versus the company’s prior forecast of $1.6 billion to $1.65 billion. This compares with analyst estimates of $1.64 billion in sales.
Additionally, the company now expects earnings of just $2.70 per share, which falls far below the Street view of $3.93 per share. Since the company’s devastating report, shares of TPX have continued to flounder; it appears that this stock will be treading water for some time while the company rethinks its growth strategy.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 12 months, this stock has slipped from an A-rated buy to a C. This is due to a series of marginal earnings reports as well as steadily declining buying pressure.
On the fundamentals side, Tempur-Pedic does well in terms of cash flow and return on equity, and does decently in terms of sales growth, operating growth and earnings growth.
However, there is plenty of room for improvement in terms of earnings momentum, earnings surprises as well as analyst earnings revisions. TPX receives a B for its Fundamental Grade and a D for its Quantitative Grade (which indicates the current level of buying pressure for the stock).
I actually recommended Tempur-Pedic to my Emerging Growth subscribers last year. However, I saw the weakness in the stock several months ago and we exited our position with plenty of time to avoid the recent catastrophic losses. This is a great example of why it is so important to keep a close watch on the fundamentals and the buying pressure of each individual stock in your portfolio.
If you’re interested in more information about my Emerging Growth strategy, I encourage you to give our three-month risk-free trial a try. As for TPX, there are simply far better buys out there with exceptional fundamentals and upside catalysts.
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