Tempur-Pedic (NYSE:TPX) seems expensive after Sealy’s acquisition
Compared to its peers, including Tempur-Pedic International Inc. (NYSE:TPX), Select Comfort seems to be quite cheap. I was bullish about Tempur-Pedic when it experienced a free fall from $85 to only $22, and right after that, its CEO purchased as much as $2.8 million of the stock value at around $25 per share. At the time of writing, it was trading at nearly $43.10 per share, with the total market cap of $2.6 billion. The market seems to value Tempur-Pedic quite expensive now at as high as 16.74 times EV/EBITDA.
Recently, Tempur-Pedic bought Sealy Corporation (NYSE:ZZ) for around $1.3 billion and agreed to change the name to Tempur Sealy International. In the first quarter of 2013, Tempur-Pedic experienced a drop of 78% in its earnings due to the acquisition and integration charges relating to Sealy acquisition. The company has raised its estimates for the full year operating performance in 2013. Revenue was revised upwards from $1.4 billion to $2.5 billion, while the EPS rose from $2.55 to $2.75.
Mattress Firm Holding Corp (NASDAQ:MFRM), another peer of the two above-mentioned company, also has a much higher valuation than Select Comfort. It is trading at around $36.10 per share, with a total market cap of around $1.2 billion. The market values Mattress Firm at 12.6 times EV/EBITDA.
Mattress Firm employs some debt in its operations. As of Jan. 2013 it had $267 million in equity, only $15 million in cash and $253 million in both long and short-term debt. What makes me worry is its high level of goodwill and intangible assets at more than $440 million. Thus its tangible book value was negative at around $(172) million.
Select Comfort is the most efficiently run
Among the three companies, Tempur-Pedic generated the lowest ROIC at only 4.63% while Mattress Firm ranked second with 6.96% ROIC. Select Comfort Corp. (NASDAQ:SCSS) turned out to be the most profitable company with as high as 42.55% ROIC. Another point that makes me more bullish about Select Comfort is its negative cash conversion cycle. In the past twelve months, its cash conversion cycle came in at the negative of (37.24) days, meaning that it could collect money from selling its products before it pays its suppliers. Thus, it could take advantage of the cash from the suppliers’ side. Mattress Firm had quite a low CCC at only 7.24 days, while Tempur-Pedic has the highest CCC at 73.07 days.
A Good Buy?
With a consistently increasing adjusted EBITDA, double digit comparable store sales growth, debt-free operations, and high ROIC, Select Comfort Corp. (NASDAQ:SCSS) seems to be a decent buy for long-term investors at its current trading price. Furthermore, the company is also the most efficient bedding retailer with negative CCC and it is valued cheaply on the market now.
The article This Bedding Retailer is a Buy originally appeared on Fool.com and is written by Anh HOANG.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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