TEMPUR SEALY (New York symbol TPX; www.tempursealy.com) is the world’s largest bedding provider. The company completed its $1.3-billion purchase of rival Sealy in March 2013. In May the company announced that shareholders had approved a change in its name, from Tempur-Pedic to Tempur Sealy.
Sealy was a major acquisition for Tempur, but it has let the company diversify into the market for traditional spring-coil beds.
The purchase should help Tempur Sealy offset rising competition in its current business; the company makes and distributes mattresses and neck pillows made of its Tempur material, which conforms to the body to provide support and alleviate pressure points, allowing sleepers to choose different ergonomic positions.
Competitors have introduced many new products and supported them with aggressive promotions. For example, Simmons Bedding and Serta have both successfully launched memory-foam mattresses that directly compete with Tempur Sealy’s products.
Stock investing: Costs from Sealy deal leave earnings short of consensus estimate
In the quarter ended June 30, 2013, revenue rose to $660.6 million from $329.5 million a year earlier. The gain included $344.6 million from Sealy.
Excluding one-time items, earnings per share fell 20.0%, to $0.36 from $0.45. That fell short of the consensus estimate of $0.40. Costs related to the Sealy deal were the main reason for the decline.
The stock now trades at 17.2 times Tempur Sealy’s forecast 2013 earnings of $2.32 a share. The company’s long-term debt of $1.9 billion is 79% of its market cap.
In the latest edition of Stock Pickers Digest, we look at the edge the company stands to gain from its acquisition of Sealy and balance that against the added risk that comes with a major purchase. We conclude with our clear buy-hold-sell advice on the stock.
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When a stock adds to its product line with a major purchase, it obviously expects the benefits to outweigh the costs of acquisition and integration. Do you have an example of a stock that had a big acquisition like this pay off with substantial gains? Can you think of a company which saw a big purchase backfire?
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