Another Select Comfort Corp. (SCSS) Sell-Off, Another Buy Opportunity

Ever-volatile premium mattress company Select Comfort Corp. (NASDAQ:SCSS) delivered an earnings report this week that failed to impress the Street in a big way. The company missed its estimates on either end, suggesting that things were getting soft (punny, I know) in the mattress world. As a result, the stock took a near 10% hit in Wednesday’s after-hours trading, and through into Thursday. Management, however, is sticking to its full-year guidance, and did not find the missed estimates to be as terrible an issue. Does the stock drop create an opportunity for the company, or is the market a prophet of more difficulty to come?

A difficult pick
Keeping a close eye on Select Comfort Corp. (NASDAQ:SCSS) for a few years has illuminated a few things about the company — sales seem to swing from great to poor, with little in between; and the stock is tremendously sensitive because of it. The five-year price chart shows near 2,000% gains — not bad—but since its peak roughly 16 months ago, Select Comfort has been a series of rapid gains and losses. While frustrating for an existing or prospective shareholder, it does suggest that the stock is frequently mis-priced. The question now is, at under $25 per share, has the market undervalued the long-term growth prospects of the company?

Select Comfort CorpSelect Comfort Corp. (NASDAQ:SCSS) is growing both organically and via acquisition. The company is opening many new stores over the course of 2013, and it recently closed its $15.5 million acquisition of competitor Comfortaire. By buying up the smaller players that mimic its designs and technologies, Select Comfort is better suited for taking on its direct peers — essentially, Tempur-Pedic International Inc. (NYSE:TPX).

Still, the company missed analyst estimates on both the top and bottom lines, coming in roughly $3 million shy on revenue ($207m vs. $210m), and $0.06 short on EPS ($0.18 vs. $0.24). On a year-over-year basis, sales increased while margins dropped, contributing to the larger loss on the bottom line.

The call
The average estimate for full year revenue is $1.36, with $1.66 in the following year — in line with management’s current expectations. This implies a 2013 P/E of around 18x, with a 2014 ratio of under 15.