What David Einhorn Sees in Tempur Sealy

Every three months on Investing Daily, update you on the stocks that some of America’s best-known investors are buying and selling. We do that by carefully parsing their 13F filings.

As you may know, institutional money managers with assets of at least $100 million must report their stock holdings to the SEC via Form 13F within 45 days of the end of each quarter. We released our latest analysis of four superstar investors’ 13F forms on November 20. (Click here to read that article.)

It’s important to keep in mind that these filings are often out of date before they’re even released, but they still contain a gold mine of information. A careful review of them can make you money.

Einhorn Makes His Move

One of the moves we discussed in our latest analysis was David Einhorn’s new position in mattress and bedding maker Tempur Sealy (NYSE: TPX). His purchase totals 1.15 million shares at an estimated average price of $43.97. That’s about 1.9% of Tempur Sealy’s outstanding shares. Einhorn is the founder and president of investment firm Greenlight Capital. As of September 30, Tempur Sealy represented 0.9% of Greenlight’s portfolio.

Perhaps Einhorn’s most notable call was his bet against Lehman Brothers in the run-up to the financial crisis. Recent winning moves include an investment in pharmacy chain Rite Aid (NYSE: RAD), whose shares went on to jump over 45% in the three months between 13F filing periods.

However, as Forbes points out, it hasn’t all been clear sailing for Einhorn: his gold investments took a hit as the yellow metal’s price declined, and he sold out of Microsoft (NasdaqGS: MSFT) just before the stock jumped on news of CEO Steve Ballmer’s pending departure.

Even so, Greenlight has posted a return of 19.1% so far this year, according to the New York Times. Since its inception in 1996, it has returned about 20% per annum.

So far, Einhorn has said little about his new Tempur Sealy stake, other than that he likes the fact that the company is in an industry that is consolidating.

That’s certainly true: according to a March 2013 Chicago Tribune article, no mattress company controlled more than 20% of the U.S. market five years ago. But that has changed at a rapid clip. Since 2009, rivals Serta and Simmons have been held by a single owner, and in March of this year, Tempur Pedic completed its purchase of rival Sealy in a blockbuster deal valued at $1.3 billion, including Sealy’s debt.

Now the combined company, Tempur Sealy, accounts for 31.7% of the mattress market. When you add the combined 33.8% belonging to Serta and Simmons, you get a previously fragmented market that’s now essentially 65.5% controlled by two companies.

Mattress Sales Ready to Bounce?

That consolidation comes at a crucial time for the mattress industry, which looks poised for an upturn after a tough few years. The industry felt the full force of the real estate meltdown, as mattress and house purchases tend to go hand-in-hand. Cash-strapped consumers have also held off on replacing their old mattresses, and a rising number of new electronics and appliances have provided stiff competition for consumers’ discretionary dollars.

However, according to the International Sleep Products Association’s (ISPA) October U.S market forecast, mattress sales will rise 2.7% for all of 2013, up from the 2% gain seen through the first eight months of this year. ISPA sees sales gaining 3.5% in 2014 and 4% in 2015.

 “Given the encouraging news about the economy and assuming some resolution of the gridlock in Washington, 2014 ought to be a rewarding year to sell home furnishings.” wrote ISPA statistics committee member Jerry Epperson in an assessment distributed with the agency’s forecast. “Auto sales, consumer electronics and appliances and some other sectors have enjoyed handsome gains in 2010-2012, filling some deferred demand for their products.”

Birth of a King-Sized Mattress Firm

Tempur Sealy is the world’s largest bedding provider, selling its products through retailers and to clients like nursing homes and hospitals. Tempur Pedic and Sealy continue to operate separately, with Tempur Pedic focusing on higher-end memory foam mattresses and pillows made from the company’s Tempur material, which contours to the sleeper’s body shape to provide additional support. Sealy mainly offers regular coil and hybrid mattresses.

The move helps Tempur Pedic grow beyond the memory foam market, where it has faced rising competition and sluggish sales. The acquisition also helps diversify Tempur Pedic’s revenue: the combined firm has distribution in 80 countries, including emerging markets in Asia and Latin America.

In addition, Tempur Sealy feels it can find efficiencies that will save the combined firm $40 million annually by the third year.

Meantime, Tempur Sealy’s sales jumped 111.4% in the third quarter, to $735.5 million from $347.9 million a year ago. Net income soared to $40.2 million, or $0.65 a share, from a loss of $2.0 million, or $0.03. Without unusual items, such as integration costs, the company earned $0.73 a share, up from $0.70. That beat the consensus forecast of $0.68 a share in profits on $710 million of revenue.

The gains were mostly due to Sealy, which boosted revenue by $389.9 million. Tempur Pedic’s North American sales gained 0.6%, while international revenue dipped 3.6% on continued weakness in Europe.

Tempur Sealy Shares are Far From Sleepy

The stock has a history of volatility, which is one risk of investing in it: as we reported in a June 2012 Investing Daily article, it plunged 48% on June 6, 2012, after rising competition in North America prompted Tempur Pedic to sharply cut its sales forecast.

However, it has gained nearly 88% since then. Along the way, it saw a nearly 12% drop on June 26, 2013, after Tempur Sealy lowered its full-year profit estimate, and a 14% surge following the company’s third quarter earnings report.

Tempur Sealy shares have a beta rating of 2.09, meaning they are more than twice as volatile as the overall market, so only investors who can tolerate that level of unpredictability should consider the stock.

The shares are also not cheap, trading at 41.3 times the company’s last 12 months of earnings, though they do sport a forward p/e that’s more reasonable, at 17.6, but still higher than competing specialty mattress maker Select Comfort (NasdaqGS: SCSS) at 14.4.

Long-Term Trends Going Tempur Sealy’s Way

On the plus side, the company continues to report good progress integrating Sealy, and it should keep benefiting from a recovering housing market and an aging population.

Prospects for its memory foam mattresses also look promising: according to a recent research report from Research and Markets, the U.S. memory foam mattress market will grow at a compound annual rate of 11.96% between 2012 and 2016, partly driven by increasing cases of sleep disorders.

The average analyst estimate calls for earnings of $2.34 a share for all of 2013, down from $2.61 in 2012, but Tempur Sealy’s profits are forecast to turn around and rise to $2.86 a share in 2014.