The Contrarian Blog

Tempur-Pedic's Guidance Startles the Bulls

by Jim Cunningham 6/7/2012 2:36 PM
Stocks quoted in this article:
Publication: "Barron's"
Publication title: "Tempur-Pedic Investors Throw a Temper Tantrum"
Publication Date: 6/6/2012
Brief Summary:

On June 6, shareholders and analysts alike were sorely surprised by Tempur-Pedic International, Inc.'s (TPX) decision to slash guidance for both its fiscal second-quarter and full-year results. As the columnist stated, the Kentucky-based company now thinks its second-quarter earnings will arrive 50% lower from last year's profit of $53.1 million, or 76 cents per share, while its revenue will decline 3%-5% from $342.2 million. Analysts were projecting earnings to rise to 85 cents per share on $394 million in revenue.

And things could get even worse for the stock, as many on the Street believe "competition caught up to Tempur-Pedic much faster than […] expected in the specialty bedding segment, which calls into question the company's brand." Speaking of TPX's brand, rivals like Sealy (ZZ) and Select Comfort (SCSS) have entered the "arena with their own specialty products, including memory foam and adjustable firmness." Although the shares could be perceived as a bargain for many speculators, the author seems to agree with one analyst's claim that "the Street's overly aggressive earnings estimates, as well as a difficult promotional pricing atmosphere […] could potentially spark a 'race to the bottom' among memory foam mattress makers: 'what price will Tempur-Pedic have to pay to be the last company standing?'"

Contrarian Takeaway:

On the heels of TPX's worse-than-expected fiscal guidance, Wall Street reacted harshly and axed the shares down some 49% to $22.39 -- their lowest daily closing since price since December 2009. Upon publication of this article, the stock was off more than 3.5%, exacerbating its year-to-date deficit of 58%.

There appears to be plenty of negativity already priced into TPX. Short interest jumped 28.7% during the two most recent reporting periods, and it now makes up 11.8% of the equity's available float. However, the bearish bandwagon is far from overloaded, as it would take just over one session to buy back all of these pessimistic positions, at TPX's average pace of trading.

But despite its fundamental and technical weakness, short-term options players appear to be optimistic toward the stock. TPX's Schaeffer's put/call open interest ratio (SOIR) of 0.55 indicates that calls nearly double puts among options slated to expire within three months. This ratio ranks in the 2nd percentile of its annual range, suggesting that short-term options players have rarely been more call-heavy during the past year.

Even the brokerage bunch is surprisingly upbeat toward this underachiever. The average 12-month price target resides at $67.88, which represents a whopping 222% premium to a more than two-year low of $21.05 tagged early in the day on June 7. Furthermore, there are eight "strong buys" and two "buy" endorsements, versus three lukewarm "holds" and not a single "sell." This bullish alignment leaves the door wide open for downgrades and/or price-target cuts. In fact, following the news, KeyBanc Capital Markets, Barclays, Piper Jaffray, and Wedbush lowered their ratings on TPX.

During the past two months, TPX has significantly lagged the S&P 500 Index (SPX) by 72%. Should this nosedive intensify, an unwinding of bullish sentiment among options players or analysts, or an additional uptick in short selling, could provide a further headwind for the downtrodden mattress and pillow manufacturer.

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