Is Tempur Sealy International Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Tempur Sealy International fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Tempur Sealy's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Tempur Sealy's key statistics:


TPX Total Return Price Chart

TPX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

101.2%

Pass

Improving profit margin

(73.5%)

Fail

Free cash flow growth > Net income growth

(26.3%) vs. (46.7%)

Pass

Improving EPS

(36.3%)

Fail

Stock growth (+ 15%) < EPS growth

44.2% vs. (36.3%)

Fail

Source: YCharts.
*Period begins at end of Q3 2010.

TPX Return on Equity (TTM) Chart

TPX Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

98.3%

Pass

Declining debt to equity

244.4%

Fail

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
Things don't look as good for Tempur Sealy (formerly Tempur-Pedic) in its second assessment as they did last year -- the bedding merchant has lost one of the four grades earned last year to finish with only three out of seven possible passing grades in its 2013 assessment. The company's profit margin has been drastically compressed since Tempur-Pedic completed its acquisition of Sealy. The Tempur-Sealy deal, which was valued at $1.3 billion, was funded by a major debt raise, which costing the company a failing grade on this test. This new company is certainly bigger, but is it a better buy? Let's dig deeper to see what Tempur Sealy might accomplish in the coming year.

My Foolish colleague Dan Caplinger notes that Tempur-Pedic's acquisition of Sealy is expected to create long-term benefits, as it allows Tempur Sealy to offer both high-end and low-end price points. The company should benefit from a housing market recovery, at least if the recovery continues apace -- mattresses are one of those purchases that often accompany a move. According to the Department of Housing and Urban Development, housing starts grew 5.3% to 891,000 in August, compared to 846,000 in June. Fool contributor Matt DiLallo notes that housing starts are expected to be in the range of 1.6 million to 1.9 million units by 2015.

Tempur Sealy, which became official this March, gained as much as 12% less than two weeks ago after reporting strong third-quarter earnings. While its North American improved modestly by 0.6%, Tempur Sealy's international sales declined 3.6%. That's still better than peer Select Comfort , which saw net income fell 23% on a revenue increase of just 7%. Fool contributor Daniel Jones notes that Select Comfort was battered by its 100-day free trial on mattresses, a big increase over the earlier 30 day grace period. Weak consumer spending U.S. might continue to weigh down heavily on both Tempur Sealy and Select Comfort mattress business, as mattresses are a rather high-ticket item that most people rarely replace.

Tempur Sealy is the most prominent mattress industry tie-up in recent memory, but several peers have also been growing through acquisitions. Select Comfort has opened several new stores during the year, and it also completed the small acquisition of Comfortaire in a deal worth $15.5 million. Mattress Firm also bolstered its market position by acquiring both Mattress Giant and Mattress Xpress. Tempur Sealy's current P/E of 36.9, compared with Select Comfort and Mattress Firm at 16.2 and 24.3, respectively, might look quite costly. However, the company has the market position and the proven growth to justify that premium, even if the mattress industry itself is a bit shaky.

Putting the pieces together
Today, Tempur Sealy has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Tempur Sealy International Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool owns shares of Tempur Sealy International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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