The movie "The Godfather" made famous the phrase, "go to the mattresses." The meaning of the quote is to prepare for battle.
Given the carnage in the market over the last two years, the investing landscape is much like a battlefield. Perhaps individual investors should "go to the mattresses."
Or, maybe they should just take a long look at the mattress-making business as this sector has been absolutely decimated by the housing crash and consumer recession.
Clearly the search for a better night’s sleep has gone by the wayside with consumers much more focused on necessity spending. Interestingly, one could argue that getting a better night’s sleep should be a necessity, but so far, that argument rings hollow.
Last week, the founder of the Magic Finger Bed passed away at the age of 92. That famous coin-operated bed became the hit of the motel world when first introduced. I certainly remember road trips in the 1970s with my family and bouncing around on that vibrating bed.
That ubiquitous invention ultimately led to multiple manufacturers and various gimmicks that promised a relaxing night of slumber. Those manufacturers enjoyed a boom that began in the late 1990s.
For years, the housing boom fueled consumer purchases of mattresses. Companies in the space thrived. Unfortunately, the growth in sales volume of mattresses was a mirage fueled by out-of-control debt.
When it all came crashing down, sales plummeted. The recession was exacerbated by the credit crisis, and as a result, companies in the space failed. Those going bankrupt include Mattress Discounters, Mattress Gallery and Foamex International.
Publicly-traded mattress companies, including Sealy (ZZ) and Tempur-Pedic (TPX), floundered due to the collapse. Share prices of both of these companies fell dramatically.
Interestingly, on the same day as the death of Mr. Magic Fingers, Sealy provided a preview of earnings for the most recent quarter that was mostly positive for the company.
The company stated that gross margin improved to 41.1% and that operating income would range from $28 to $30 million on revenue of $294 million to $301 million. ZZ stock was up more than 20% in the immediate aftermath of the report.
Given that sales volume will never be lower, investors should be optimistic about the future in the mattress space. The tough environment has prepared those surviving companies to by very profitable when sales increase.
Mattresses do not last forever. The current malaise is resulting in large pent-up demand for mattresses that will eventually be replaced. We certainly don’t want 2009 to be a repeat of "The Year of the Bedbug."
I think ZZ is an excellent opportunity especially given its smaller capitalization.
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