This Famed Value Investor is Buying More Tempur-Pedic, Should You?

Chieftain Capital Management, managed by John Shapiro, Tom Stern, and Joshua Slocum, is an investment fund with a little over $1.3 billion in assets under management. The fund was originally founded in late 2009, when Shapiro and the rest of his posse split from Glenn Greenberg. Most of Chieftain’s holdings are in stocks, particularly those that are trading at attractive valuations in relation to historical and industry norms; this can be seen by looking at the fund’s 13F portfolio.

Tempur-Pedic International Inc. (NYSE:TPX)

As is seen when looking at Chieftain’s holdings, the fund has a huge interest in Tempur-Pedic International Inc. (NYSE:TPX), which accounts for almost 11% of its 13F portfolio. At the end of the second quarter, Chieftain held $147.9 million in the stock. According to a recent Form 4 filing with the SEC, Chieftain is feeling quite bullish about Tempur-Pedic, to the tune of $16.4 million. The fund bought in excess of 500,000 additional shares of the company earlier this week in three separate transactions. The purchases were carried out at roughly $31 a pop, and altogether, the move increases Chieftain’s holdings in Tempur-Pedic by 11.1%.

Consequently, it’s worth delving into the details of this transaction to determine possible motivations, and whether investors should follow Chieftain’s lead. Empirical studies have proven that investors who mimic or “monkey” the world’s most successful money managers can beat the market by 7 percentage points a year, so this isn’t something to simply shrug off. Here’s a more detailed look at this market-beating strategy.

Tempur-Pedic has had a wild ride in 2012. Since the start of the year, shares of the mattress and pillow manufacturer have lost 41.9% of their value, though the summer has been a bit kinder to the company. After hitting rock bottom around $22.39 a share, the stock has risen back above the $30 mark.

Investors became sour on Tempur-Pedic after company execs unleashed a massive guidance adjustment in early Q2, decreasing its quarterly outlook from $0.86 to $0.36 a share, shaving expectations by more than half overnight. By year’s end, the company announced it was expecting sales to remain stagnant, after they’d grown by 25% a year since 2010. While most of the blame can be given to increased competition from the likes of traditional mattress makers Sealy Corporation (NYSE:ZZ), Serta, and Simmons, Tempur-Pedic has also had a tough time cut costs in-step with guidance declines.

By the end of the year, the Street is expecting the company to reach earnings of $2.79 a share after hitting $3.18 in 2011. Compared to publicly traded competitors like Sealy, Select Comfort Corp. (NASDAQ:SCSS), Leggett & Platt, Inc. (NYSE:LEG), and Mattress Firm Holding Corp. (NASDAQ:MFRM), who are all expecting positive growth over the next twelve months, it’s easy to see why investors have been bearish.

Interestingly, Tempur-Pedic is looking rather attractive from a valuation standpoint no matter how you slice it. Shares currently trade at a lowly 10 times TTM earnings, less than half the industry average, and below Select Comfort (25.3X), Leggett & Platt (22.6X), and Mattress Firm (20.0X). Even more intriguing is that TPX’s earnings are valued at a 37.5% discount to its own 5-year historical average.

Now, before the bears cry that this stock is a value-trap, consider the following: after it’s 2012 hiccup, Tempur-Pedic expects its bottom line to expand at an average rate of 13.2% a year over the next half-decade. These aren’t world-beating projections by any means, but they are solid nonetheless.

The real kicker comes when we determine how investors are valuing this future growth, and if the PEG ratio is any indication, investors are overselling the stock quite significantly. Based on five-year EPS estimates, Tempur-Pedic currently sports a PEG of 0.76; typically any figure below 1.00 signals an undervaluation. More importantly, this is below its aforementioned competitors including: Sealy (1.00), Select Comfort (1.03), Leggett & Platt (1.51), and Mattress Firm (0.79).

Last week’s (rather cheap) $228.6 million purchase of Sealy should only give more investors more of a reason to be bullish. The move is expected to pay immediate dividends to Tempur-Pedic’s bottom line, and will give it a broader product mix outside of its NASA-inspired mattresses. As Bradley Thomas of KeyBanc Capital Markets so aptly stated, “Tempur-Pedic will firmly become a part of the normal mattress world, and will no longer be a niche player.”

In short, we know that Tempur-Pedic can generate above average-margins – operating and net are nearly four times industry averages – and the company has consistently generated double-digit earnings growth since the recession. At its current prices, however, the markets are valuing the company like an industry laggard. With TPX’s bottom line expected to get back on track in 2013, now’s a clear opportunity to buy in while shares are still cheap. Given that John Shapiro and Chieftain Capital are known throughout the hedge fund industry for their value investing pedigree, it’s tough to argue against a TPX comeback.

Other money managers who held shares of the mattress maker at the end of the second quarter included: Louis Bacon, Ken Fisher, Joel Greenblatt, Cliff Asness, and Jim Simons. Remember when we mentioned that investors who monkey the market’s best fund managers could generate consistent outperformance? There’s no better batch of value investors than the group that’s currently long Tempur-Pedic, but we’ll let you be the judge. Here’s a complete listing of the funds that are invested in the stock. Enjoy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!