Original Recommendation

Tempur Sealy International Inc

Tempur Sealy International Inc (TPX)

our opinion

sell

current price

$78.22

target price

$64.00

market cap

$4.5Bn

div yield

0%

  • Tempur Sealy has a shaky balance sheet with goodwill and intangible assets making up almost half of its total assets. Any impairment will wipe out shareholders in a heartbeat.

trade details

Tempur Sealy International (NYSE: TPX) looks very vulnerable to us.

You’ve certainly heard of their brands: Tempur-Pedic, Sealy Posturepedic and Stearns & Foster.

It primarily sells mattresses. But it sells other bedding products too.

We noticed that Tempur Sealy’s balance sheet is a disaster waiting to happen.

Its goodwill and intangible assets make up over 45% of total assets. These “assets” are mostly subjective in nature. (For example, brand value is an intangible asset).

Any sort of disaster could force a big write-down. Think E-coli outbreak at Chipotle. Lymphoma cases in herbicide from Monsanto. Or like BP during its oil spill.

These are one-time impacts. But it could force a huge revaluing of these companies.

Having TPX’s goodwill and intangible make up 45% of total assets  could essentially wipeout shareholders in a heartbeat.

But that’s not it. Its free cash flow is pretty much gobbled up by paying the interest on its $1.6 billion debt load. It doesn’t reward shareholders in any way – via dividends nor buybacks.

So the only thing shareholders make money is through capital gains.

Therefore, we need to look through revenue or earnings growth. Revenue growth was 8% yr/yr through the first six months. Not great. Gross profit margins are consistently above 40%.

But competition is tough and saturated. Mattress companies like Purple appeal to the younger generation through humorous marketing videos. Or mattress company Puffy who quickly climbed the ranks with huge exposure.

Another point is people don’t switch mattresses frequently enough. Maybe once every 10 years.

Lastly – tempur pedic mattresses might be luxurious. But they’re also $2,000+. Just for the mattress.

When 50% of the country can’t afford a $500 expense… you’ve essentially priced out half of your potential market. The only way to get those users to buy are extreme discounting, financing, etc…

That in and of itself destroys brand value.

TPX is valued at 15x forward earnings… meaning it’d take you 15 years to make your money back if you invested for a future dollar’s worth of earnings. But TPX doesn’t return any profits back to you.

So even a 15x multiple is rich for us. Especially if we’re in one of the longest economic bull markets of all time.

People won’t buy mattresses in recession. TPX fell almost 90% in the Great Recession. And over 70% in 2012 due to growing competition – including 50% in one day.

(We’ve been writing about the race to 0% interest rates – and negative – around the world. Investors will flock to value and shareholder rewarding companies. We think TPX will fall greatly out of favor as sales stagnate. And none of its profits go back to investors. Investors will reallocate their money elsewhere).

TPX is 10% away from its all-time high of $86. That’ll be our stop loss.

We think TPX has massive room to fall. At least to its 200-day moving average around $62. That’ll be our first profit target.

Recommendation: Sell short Tempur Sealy International (TPX) down to $76. DO NOT put more than 1-2% of your portfolio into this position. We’ll place an $86 stop loss on our position.

**Speculators can look to the $77.5 January 2020 puts (TPX2000117P00077500) for no more than $6.75. There’s almost no volume on these options so it might be tough to place this trade.