ZachStocks

The markets have been anything but sleepy this summer, but there have been several sleep related stories that have driven profits and losses. Back in June we took a look at Resmed, the company which makes devices for sleep apnea. Today we turn our attention to Tempur Pedic (TPX) the non-traditional mattress maker.

Yesterday, TPX beat expectations by announcing Q2 earnings of $0.39 which was 30% above last years number. Sales were up 18% and while margins were down 30 basis points, this was a smaller dip than analysts had expected. The company raised guidance for the year to $1.065 - 1.085 billion and EPS of $1.63-$1.66. During the quarter, the company repurchased 2.3 million shares and increased the number of doors it sells products through both domestically and internationally. In short the company is executing well and the stock reflected this news by jumping $3.35 or over 11.5%

After such a jump one would often assume that the stock would be over priced, but in reading through the reports, it looks like the stock may continue to be a good deal even after a phenomenal run. If the company meets its guidance this year and is roughly in-line with analyst expectations in 2008, then it is only trading a bit above 16 time next years earnings which is attractive given its growth trends and stable business.

Tempur Pedix has mattresses that contour to the body relieving stress points and providing better support for healthier joints and specifically the spine. Customers have reported experiencing less back pain and deeper nights sleep after using TPX mattresses. The company sells through many individual mattress retailers and has continued to increase number of doors quarter after quarter. This is true both internationally and domestically as the company reported 4,670 international doors.

As the company plans for additional growth, there are several venues that should help them expand sales. The first involves the company’s recent entrance into department stores. This should provide significant upside to sales as the robust distribution channels are already in place, and TPX’s will be able to reach customers that had not previously been exposed to the products it offers.

Secondly, the company is aggressively pursuing hotel contracts to put mattresses in more well known chains. Although the company currently has 7,500 installed mattresses in hotels, an additional push could boost that number significantly higher. While this prospect is exciting enough, the real purpose behind this drive is not simply to sell to the hotels, but more of a marketing push to get consumers who stay at the hotel to become familiar with the mattresses and want one for their own home.

Finally, the medical field is a huge potential market as hospital and nursing home beds represent millions of potential units sold. There has been much in the way of discussion and negotiation with healthcare providers but little in the way of actual sales so far. One of the impediments is that the current Medicare regulations do more to reimburse treatment of bedsores than prevention. TPX products have proven to reduce the instance of bedsores, so it seems logical that changes in regulations and hospital perceptions could greatly improve TPX’s ability to sell to these areas.

The board of directors has recently approved another share repurchase program to the tune of $200 million. If the company were able to repurchase shares at the current price, it would retire over 6.2 million shares or 7.4% of the float. This magnifies earnings and I should note that the company’s guidance does not account for this potential reduction in the share count.

So it seems the future is bright for TPX and although it would obviously have been better to have bought a year ago, I still think there is a lot of money to be made in this name.

TPX notes

FD: Author does not have a position in TPX

Additional Reading:

Stock Market Beat reviews TPX earnings.