Courtesy of Dr. Paul Price at Real Money
Tempur-Pedic International: A history lesson for investors
Sound sleepers who held TPX shares were feeling less rosy upon awaking Wednesday as the stock was down about 42% pre-market to about $25. TPX had been a momentum players’ favorite back on April 18th when it peaked at an all-time high of $87.43. Those buying at the high were paying 22.4x the then current 2012 estimate of $3.90 per share. That was a 49% premium versus their average multiple of just 15x for the eight year period 2004 – 2011.
In three of the previous eight years TPX averaged nearer 12x final EPS. What drove the stock from $87 just months ago to $25? The general market pullback certainly contributed but the biggest factors were simply regression to the mean valuation and a surprise announcement Tuesday evening that guidance was being reduced to $2.70 from $3.93.
When the only reason to own a stock was ‘because it’s moving up’ there was a rush for the exits by virtually all short-term players.
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At Wednesday morning’s $26 level the shares now fetch a below average multiple of 9.6x the already reduced estimate. That’s the best valuation since the 2008-09 lows. None of the analysts that loved, loved, loved TPX in the $80 – $90 range now wants to be associated with it in the mid $20’s.
This high beta stock has a leveraged balance sheet (LT debt = 87% of capital) making it less than high-quality. Speculators might want to take a look however as they are still nicely profitable. TPX showed similar large declines in 2005 ($25 to $9.40) and in 2007-08 ($37.90 to $5.00). From the 2005 low it gained 303% in 2 years. The 2008 low went even worse through early March 2009 before rebounding more than 1672% the 2008 bottom to this year’s high.
Ironically, now that the price and valuation are low you won’t find many people recommending the shares. That was the case in 2005 and 2008 near the lows as well.
The trades: Buy TPX at $26 or under
Disclosure: No position
