There’s not much that can stop U.S. home prices from rising these days. Research firm CoreLogic recently reported that home prices in April rose 12.1% from the previous year — the 14th consecutive monthly increase and the largest year-on-year gain since February 2006. Last month, I highlighted three stocks to invest in to capitalize on the housing boom: lumber giant Weyerhaeuser Company (NYSE:WY), homebuilder D.R. Horton, Inc. (NYSE:DHI), and home improvement retailer The Home Depot, Inc. (NYSE:HD).
Today, I’ll focus on three other ways to play the housing boom via another industry — beds and furniture — which will remain in high demand as home sales rise.
A tale of foam and coils
Tempur-Pedic International completed the acquisition of its rival, Sealy Corporation (NYSE:ZZ), back in March for $1.3 billion, creating the largest publicly traded mattress and pillow maker in the country — Tempur Sealy International Inc (NYSE:TPX).
For several years, Tempur-Pedic held a niche market in foam mattresses, which are based on NASA technology. However, in recent years, Tempur-Pedic has lost that niche to privately held rivals Simmons Bedding and Serta, which also started producing foam mattresses. This battle has also led to margin-crushing price reductions across the industry. Last April, Tempur-Pedic stock plunged nearly 50% in a single day after the company gave a bleak full-year forecast that revealed that its market share was shrinking at a faster-than-expected rate.
To spur growth again, Tempur-Pedic acquired Sealy, which had been struggling to survive for the past six years. Sealy, which owns the Posturepedic and Stearns & Foster brands, manufacturers traditional spring coil beds, which complemented Tempur-Pedic’s foam mattresses. Although merged, the two companies still operate independently with two CEOs – Larry Rogers at Sealy and Mark Sarvary at Tempur-Pedic.
During the first quarter, Tempur Sealy International Inc (NYSE:TPX) reported adjusted earnings of $0.62 per share, or $38.2 million. This topped Thomson Reuters’ consensus by a penny. Meanwhile, revenue rose 1.5% year-on-year to $390.1 million, also beating the consensus estimate of $347.27 million. Tempur Sealy International Inc (NYSE:TPX)’s top line included $46.7 million in sales from Sealy. Excluding Sealy, Tempur-Pedic’s sales would have declined 10.7% from the prior year quarter, weighed down primarily by weak North American sales.
Although Tempur Sealy International Inc (NYSE:TPX)’s earnings aren’t particularly impressive, they show that the company has managed to stop the bleeding that nearly sank the company last year. Acquiring Sealy was a good move that allowed it to diversify its product line and grow its top line again. Considering that the stock is still down nearly 4% over the past twelve months but is trading at 12.4 times forward earnings with a five-year PEG ratio of 1.2, I think that this stock could slowly recover as demand for new beds rises along with the housing market.
Tuck your cash under this mattress
For investors who think Tempur Sealy International Inc (NYSE:TPX)’s growth might be too sluggish, investing in brick-and-mortar retailer Mattress Firm Holding Corp (NASDAQ:MFRM), which carries mattresses from Tempur Sealy International Inc (NYSE:TPX) and its rivals, might be a better alternative. Mattress Firm Holding Corp (NASDAQ:MFRM) has been under pressure for most of the past year due to concerns regarding shaky consumer confidence and the pricing war between mattress companies. However, Mattress Firm Holding Corp (NASDAQ:MFRM)’s first-quarter earnings came in better than anyone expected, and shares recently surged to a 52-week high.
