Rating Update: Stock Rating B-Positive (5/16/19)-Tempur Sealy International Inc (TPX).

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BUSINESS

Tempur Sealy International, Inc., together with its subsidiaries, develops, manufactures, markets, and distributes bedding products. The company operates through two segments, North America and International. It provides mattresses, foundations, and adjustable bases, as well as other products comprising pillows and other accessories under the TEMPUR, Tempur-Pedic, Sealy, and Stearns & Foster brands. The company sells its products through third party retailers, including third party distribution, hospitality, and healthcare; and company-owned stores, e-commerce, and call centers, as well as offers Cocoon by Sealy branded products through online. It is also involved in licensing its Sealy, and Stearns & Foster brands, technology, and trademarks to other manufacturers. Tempur Sealy International, Inc. was founded in 1989 and is based in Lexington, Kentucky.
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INVESTMENT RATING

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With future capital returns forecasted to be above the cost of capital, TPX is expected to continue to be a major Value Builder.

Tempur Sealy has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Tempur Sealy has a neutral Appreciation Score of 42 but a good Power Rating of 81, resulting in the Positive Value Trend Rating.

Tempur Sealy’s stock is selling above targeted value. The current stock price of $62.46 compares to targeted value 12 months forward of $53.
This neutral appreciation potential results in an appreciation score of 42 (58% of the universe has greater appreciation potential.)
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Tempur Sealy has a Power Rating of 81. (This good Power Rating indicates that TPX has a better chance of achieving attractive investment performance over the near to intermediate term than all but 19% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been extremely favorable; and earnings estimate behavior for TPX has been slightly favorable recently. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

TPX’s financial strength is average. Financial strength rating is 41.
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Relative to the S&P 500 Composite, Tempur Sealy International Inc has significant Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that TPX is extremely high risk. Relative weaknesses include: low financial strength, high stock price volatility, and high financial leverage. TPX’s valuation is high: low dividend yield, moderate P/E ratio, and high price/book ratio. TPX has unusually low market capitalization.

CURRENT SIGNALS

Tempur Sealy’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Tempur Sealy’s current technical position is very strong. The stock price is in a 4.4 month up move. The stock has appreciated 58.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Tempur Sealy International Inc (NYSE: TPX): negative upside/downside volume developed.
The stock is currently rated B.
Tempur Sealy International Inc (NYSE: TPX) stock enjoyed a major increase of 27.3% on 5/16/19. The shares closed at $1.68. Moreover, this advance was accompanied by above average trading volume at 136% of normal. Relative to the market the stock has been exceptionally strong over the last nine months but has declined -1.3% during the last week.

CASH FLOW

In 2018, Tempur Sealy generated a slight increase in cash of +$3.9 million (+9%). Sources of cash were slightly larger than uses. Cash generated from 2018 EBITDA totalled +$384.3 million. Non-operating uses consumed -$37.0 million (-10% of EBITDA). Cash taxes consumed -$46.4 million (-12% of EBITDA). Re-investment in the business amounted to -$81.6 million (-21% of EBITDA). On a net basis, debt investors received -$199.2 million (-52% of EBITDA) while equity investors removed -$16.2 million (-4% of EBITDA).
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Tempur Sealy’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Tempur Sealy International Inc Peer Group. In most years, Tempur Sealy was in the second quartile and top quartile. Currently, Tempur Sealy is at median at -10% of EBITDA (-$37.0 million).

Tempur Sealy’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Tempur Sealy International Inc Peer Group. In most years, Tempur Sealy was in the lower quartile and third quartile. Currently, Tempur Sealy is slightly below median at -12% of EBITDA (-$46.4 million).

Tempur Sealy’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Tempur Sealy International Inc Peer Group. In most years, Tempur Sealy was in the top quartile and lower quartile. Currently, Tempur Sealy is upper quartile at -21% of EBITDA (-$81.6 million).

Tempur Sealy’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Tempur Sealy International Inc Peer Group. In most years, Tempur Sealy was in the top quartile and lower quartile. Currently, Tempur Sealy is lower quartile at -52% of EBITDA (-$199.2 million).

Tempur Sealy’s Equity Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Tempur Sealy International Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Tempur Sealy was in the lower quartile and top quartile. Currently, Tempur Sealy is upper quartile at -4% of EBITDA (-$16.2 million).

Tempur Sealy’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Tempur Sealy International Inc Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Tempur Sealy was in the top quartile and third quartile. Currently, Tempur Sealy is at median at +1% of EBITDA (+$3.9 million).
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Tempur Sealy’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Tempur Sealy International Inc Peer Group as well. In most years, Tempur Sealy was in the top quartile and lower quartile. Currently, Tempur Sealy is lower quartile at +2%.

PROFITABILITY

Tempur Sealy’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
Tempur Sealy’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of Tempur Sealy’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Tempur Sealy’s return on equity is at the upper quartile (47.8%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is below median (5.9%) reflecting asset turnover that is at median (0.93X) and below median pretax margin (6.4%).
Tax “keep” rate (income tax management) is at the lower quartile (69.1%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the upper quartile (11.70X).

GROWTH RATES

Overall, Tempur Sealy’s growth rate has slowed very considerably in recent years.
Tempur Sealy’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 16.3% per year. (More recently it has been -0.1%.)

Total asset growth has been 21.1% per year. (More recently it has been 3.6%.)

Annual E.P.S. growth has been 5.8% per year.

Equity growth has been 15.4% per year. (More recently it has been 49.7%.)

Tempur Sealy’s consensus growth rate forecast (average of Wall Street analysts) is 26.1% — substantially above the average of the historical growth measures.
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Relative to the Tempur Sealy International Inc Peer Group, Tempur Sealy’s historical growth measures are erratic. Revenue growth (16.3%) has been upper quartile. Total asset growth (21.1%) has been upper quartile. Equity growth (15.4%) has been slightly above median. E.P.S. growth (5.8%) has been lower quartile.

Consensus growth forecast (26.1%) is upper quartile.
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PRICE HISTORY

Over the full time period, Tempur Sealy’s stock price performance has been volatile and exceptional. Between July, 2008 and May, 2019, Tempur Sealy’s stock price rose +565%; relative to the market, this was a +193% gain. Significant price moves during the period: 1) October, 2013 – November, 2015: +107%; 2) June, 2012 – March, 2013: +112%; 3) March, 2012 – June, 2012: -72%; 4) August, 2010 – July, 2011: +169%; and 5) February, 2009 – April, 2010: +449%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 37.2% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of 37.2% is upper quartile relative to Tempur Sealy International Inc Peer Group.

Current 5-year total return performance of 4.1% is lower quartile relative to the S&P 500 Composite.
Through April, 2019, with lower quartile current 5-year total return of 4.1% relative to S&P 500 Composite, Tempur Sealy’s total return performance is below median relative to Tempur Sealy International Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TPX’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Price/earnings ratio is near the upper quartile. Ratio of enterprise value/assets is above median. Ratio of enterprise value/earnings before interest and taxes is at median. The lowest factor, the ratio of enterprise value/revenue, is near the lower quartile.
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Tempur Sealy has a very large value gap compared to the median valuation. For TPX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.86X to 1.46X. If TPX’s ratio of enterprise value/revenue were to fall to 1.46X, its stock price would be lower by $-19 to $43.
For TPX to fall to lower quartile valuation relative to the Tempur Sealy International Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.86X to 0.99X. If TPX’s ratio of enterprise value/revenue were to fall to 0.99X, its stock price would decline by $-43 from the current level of $62.

VALUE TARGETS

With future capital returns forecasted to be above the cost of capital, TPX is expected to continue to be a major Value Builder.
Tempur Sealy’s current Price Target of $66 represents a +6% change from the current price of $62.46.
This neutral appreciation potential results in an appreciation score of 42 (58% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 42, the high Power Rating of 81 results in an Value Trend Rating of B.
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Tempur Sealy’s current Price Target is $66 (-5% from the 2018 Target of $70 but +6% from the 05/16/19 price of $62.46). This plateau in the Target is the result of a -6% decrease in the equity base and a +1% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
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PTR’s return on equity forecast is 116.% — substantially above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 694%.

PTR’s growth forecast is 3.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2015 peak of 26%.

PTR’s cost of equity forecast is 10.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is below the 2014 peak of 14.1%.
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At Tempur Sealy’s current price of $62.46, investors are placing a positive value of $29 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 83.5% versus a cost of equity of 11.2%.
PTR’s 2020 Price Target of $66 is based on these forecasts and reflects an estimated value of existing assets of $46 and a value of future investments of $20.

About John Lafferty 35825 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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