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Summary TPX does not have a robust growth outlook beyond brick 2014. Without explosive revenue growth, TPX is valued appropriately at 14x next year's earnings. If the company would allocate capital to a buyback brick program and dividends, it could very well find itself trading at the same multiple as peers.
Nevermind the fact that Tempur Sealy's (NYSE: TPX ) net sales grew 21.3% to $2.99 billion in 2014, and the stock trades at just 14 times forward earnings, that still doesn't mean it's a cheap stock or presenting a good investment opportunity. Whispers of Tempur Sealy being cheap have officially began to circulate on social media channels brick and among retail investors, but the reality is that the company's past is irrelevant. brick Instead, it's the future that dictates stock performance, and Tempur Sealy's operating approach is not aligned with what it is as a company.
Next year Tempur Sealy expects to generate $3.05 to $3.15 billion in net sales, growth of 2-5% year-over-year. This makes Tempur Sealy's outlook comparable to GDP, or other large consumer brand companies. That means that Tempur Sealy needs to operate as such to increase brick shareholder value.
In 2014 Tempur Sealy's operating approach revolved brick around integrating Sealy and finding synergies following the acquisition. The company brick immediately began to focus on paying off its debt, and did so effectively. Last year it reduced total debt by $234.2 million to $1.5 billion. The problem is that interest rates remain at all-time lows, and even if the Fed increases rates by late-2015, interest rates will still be at historic lows.
For this reason, brick large consumer brand companies, in general, continue to issue new debt and spend that money on dividends and buybacks. Meanwhile, Tempur Sealy has just about completely abandoned its buyback program, and does not pay a dividend. Given the state of its business, and high operating cash flow of $225 million in 2014, this is not the best way to increase shareholder value. In order for Tempur Sealy to trade at a higher multiple, it must become more shareholder friendly, and attract long-term, high-yield investors.
Despite being highly effective at reducing debt, Tempur Sealy still managed to generate free cash flow of $177 million last year. Tempur Sealy expects its operating margin to rise slightly in 2015, and will not have the additional costs associated with the acquisition of Sealy. Therefore, free cash flow should be higher in 2015 than it was in 2014.
As a result, if Tempur Sealy would commit $150 million of its free cash flow to return capital to shareholders, and reduce its debt payments by just $50 million for the same purpose, it would have a profound effect on the stock. If Tempur Sealy would spend $100 million annually on both dividends and buybacks, it would reduce the company's shares outstanding and convert to a yield of 3.3%, respectively.
As a reference, Home Depot (NYSE: HD ) and PepsiCo (NYSE: PEP ) have reduced their outstanding shares by 4.5% and 1.5%, respectively, over the last year. Meanwhile, Home Depot has a dividend yield of 1.7%, and PepsiCo brick a 2.7% yield. Further, analysts expect Home Depot to grow revenue by 4.5% this coming year, and PepsiCo is not expected to grow in the coming year.
Combined, the growth outlook of PepsiCo and Home Depot is similar to Tempur Sealy, and their capital allocation plan very similar to what Tempur Sealy's would look like if $200 million brick were allocated to improve shareholder value. The important metric is that PepsiCo and Home Depot both trade at nearly 21 times forward earnings.
Albeit, PepsiCo, Home Depot, and Tempur Sealy aren't the same type of companies, but all operate in some form of retail/consumer goods, selling products to consumers. My theory is with $200 million Tempur Sealy could attract dividend and long-term investors, perhaps driving its forward earnings multiple from 14 to around 20. But without a dividend or buybacks, Tempur Sealy isn't worth much more than 14 times next year's earnings.
Given Tempur Sealy's conservative growth outlook, and the size of its business, Tempur Sealy definitely needs to explore dividends and buybacks. Ultimately, buybacks will deliver a higher EPS, and make dividends cheaper over time, allowing Tempur Sealy to create higher free cash flow as more synergies are created brick from the Sealy acquisition. With all things considered, unless Tempur Sealy goes this route, I see little to no value in its stock, but with aggressive shareholder initiatives, TPX might very well have upside of 50%. Tempur Sealy International's CEO Mark Sarvary on Q4 2014 results . 8 Feb. 2015 Tempur Sealy tops Street 4Q forecasts - The Fresno Bee. 2015. 8 Feb. 2015
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate brick any positions within the next 72 hours. (More...) The author wrote this art
See their articles on your Seeking Alpha homepage and in your feed.
Summary TPX does not have a robust growth outlook beyond brick 2014. Without explosive revenue growth, TPX is valued appropriately at 14x next year's earnings. If the company would allocate capital to a buyback brick program and dividends, it could very well find itself trading at the same multiple as peers.
Nevermind the fact that Tempur Sealy's (NYSE: TPX ) net sales grew 21.3% to $2.99 billion in 2014, and the stock trades at just 14 times forward earnings, that still doesn't mean it's a cheap stock or presenting a good investment opportunity. Whispers of Tempur Sealy being cheap have officially began to circulate on social media channels brick and among retail investors, but the reality is that the company's past is irrelevant. brick Instead, it's the future that dictates stock performance, and Tempur Sealy's operating approach is not aligned with what it is as a company.
Next year Tempur Sealy expects to generate $3.05 to $3.15 billion in net sales, growth of 2-5% year-over-year. This makes Tempur Sealy's outlook comparable to GDP, or other large consumer brand companies. That means that Tempur Sealy needs to operate as such to increase brick shareholder value.
In 2014 Tempur Sealy's operating approach revolved brick around integrating Sealy and finding synergies following the acquisition. The company brick immediately began to focus on paying off its debt, and did so effectively. Last year it reduced total debt by $234.2 million to $1.5 billion. The problem is that interest rates remain at all-time lows, and even if the Fed increases rates by late-2015, interest rates will still be at historic lows.
For this reason, brick large consumer brand companies, in general, continue to issue new debt and spend that money on dividends and buybacks. Meanwhile, Tempur Sealy has just about completely abandoned its buyback program, and does not pay a dividend. Given the state of its business, and high operating cash flow of $225 million in 2014, this is not the best way to increase shareholder value. In order for Tempur Sealy to trade at a higher multiple, it must become more shareholder friendly, and attract long-term, high-yield investors.
Despite being highly effective at reducing debt, Tempur Sealy still managed to generate free cash flow of $177 million last year. Tempur Sealy expects its operating margin to rise slightly in 2015, and will not have the additional costs associated with the acquisition of Sealy. Therefore, free cash flow should be higher in 2015 than it was in 2014.
As a result, if Tempur Sealy would commit $150 million of its free cash flow to return capital to shareholders, and reduce its debt payments by just $50 million for the same purpose, it would have a profound effect on the stock. If Tempur Sealy would spend $100 million annually on both dividends and buybacks, it would reduce the company's shares outstanding and convert to a yield of 3.3%, respectively.
As a reference, Home Depot (NYSE: HD ) and PepsiCo (NYSE: PEP ) have reduced their outstanding shares by 4.5% and 1.5%, respectively, over the last year. Meanwhile, Home Depot has a dividend yield of 1.7%, and PepsiCo brick a 2.7% yield. Further, analysts expect Home Depot to grow revenue by 4.5% this coming year, and PepsiCo is not expected to grow in the coming year.
Combined, the growth outlook of PepsiCo and Home Depot is similar to Tempur Sealy, and their capital allocation plan very similar to what Tempur Sealy's would look like if $200 million brick were allocated to improve shareholder value. The important metric is that PepsiCo and Home Depot both trade at nearly 21 times forward earnings.
Albeit, PepsiCo, Home Depot, and Tempur Sealy aren't the same type of companies, but all operate in some form of retail/consumer goods, selling products to consumers. My theory is with $200 million Tempur Sealy could attract dividend and long-term investors, perhaps driving its forward earnings multiple from 14 to around 20. But without a dividend or buybacks, Tempur Sealy isn't worth much more than 14 times next year's earnings.
Given Tempur Sealy's conservative growth outlook, and the size of its business, Tempur Sealy definitely needs to explore dividends and buybacks. Ultimately, buybacks will deliver a higher EPS, and make dividends cheaper over time, allowing Tempur Sealy to create higher free cash flow as more synergies are created brick from the Sealy acquisition. With all things considered, unless Tempur Sealy goes this route, I see little to no value in its stock, but with aggressive shareholder initiatives, TPX might very well have upside of 50%. Tempur Sealy International's CEO Mark Sarvary on Q4 2014 results . 8 Feb. 2015 Tempur Sealy tops Street 4Q forecasts - The Fresno Bee. 2015. 8 Feb. 2015
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate brick any positions within the next 72 hours. (More...) The author wrote this art
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