|
Published: January 14, 2010
The phrase "failure of imagination" has
returned to the lexicon. It may turn out to be an appropriate
catchphrase for the just-ended 2000s.
It also applies to a few situations on Wall Street, where
investors seem unable to wrap their arms around the idea that
things won't always be the way they are.
That's certainly true for Sealy Corp. (NYSE: ZZ). The
mattress maker released earnings today that reversed a year-ago
loss but reflected the country's persistent economic doldrums.
Let's face it: People don't buy pricey mattresses during a
downturn. But investors are pricing Sealy as though the company
is always going to be moving mattresses against the economic
tide, and that's not true.
For three years, Sealy -- the world's largest bedding maker,
with about a 20% share of the $6.9 billion mattress market --
posted earnings of roughly $0.82 a share. Then the housing
market fell to pieces and, with it, Sealy's results. The company
posted a nasty fourth-quarter loss in 2008 and has struggled
along since. Not all of the furniture market was so lucky:
Competitor Simmons went bankrupt.
But a recovery will come, even if it likely will lag housing,
and long-term investors should consider these shares not based
on what will happen in the next two quarters but what will
happen in the next two years. A return to Sealy's sweet spot --
roughly $0.82 in per-share earnings -- should propel these
shares, currently trading at less than $3.50, north of $12,
their pre-financial crisis range.
Sealy shares came under intense pressure today after the
company's earnings report, which came as a disappointment. There
was some expectation in the air: Competitor Tempur-Pedic
International Inc. (NYSE: TPX) earlier this month announced
better-than-expected preliminary fourth-quarter results both in
terms of revenue and earnings, and also upped its guidance for
2010. Sealy shares had gained about +20% since Tempur-Pedic's
release. They gave it back Thursday, however, closing down
-9.7%, to $3.46, making it one of the biggest decliners on the
New York Stock Exchange.
These are not shares that look particularly great from a
balance-sheet perspective: The company has negative shareholder
equity -- liabilities exceed assets -- and that's a situation
that has persisted for years. (The gap does appear to be
narrowing some, however.) On the plus side, though, the company
has a lot of cash on hand. It's also done a better job
collecting on receivables, and it has pared inventories. The
company is more than able to hunker down and wait for a
recovery.
The question, of course, is could you sleep at night if you
owned these shares? That depends entirely on your view about the
future and your goal for the trade. Short-term traders are
likely to see some valuation return after the post-earnings
reactionary smoke clears. Longer-term investors who believe in
strong brands and are confident in a recovery likely will rest
easy knowing that there shares are poised to mirror the
economy's steady growth during the next several years.
Buy Sealy when it's selling like a company that struggles to
earn two cents a share and sell it when Wall Street reprices it
with a fair value commensurate to its industry-leading position.
That's a strategy that can make any investor's dreams come true.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing |
