Friday, July 17, 2009

Tempur Pedic trading up after beating expectations (TPX)

AlphaNinja - Last night, Tempur Pedic(TPX) reported higher than expected earnings, as gross margin improvements offset higher operating costs.

They guided full year earnings within the range of the street's 79cent expectation.

From the release:

-Gross profit margin was 46.6% as compared to 44.4% in the second quarter of 2008. The gross profit margin increased as a result of lower commodity costs, improved efficiencies in manufacturing and improved pricing, partially offset by fixed cost de-leverage related to lower production volumes.
-Operating profit margin was 15.7% as compared to 15.2% in the second quarter of 2008. The Company reduced operating expenses by $12.5 million to $57.2 million in the second quarter of 2009 from $69.7 million in the second quarter of 2008.

-Reflecting the Company's continued focus on generating cash, the Company generated $39.5 million of operating cash flow in the second quarter of 2009.

-During the quarter, the Company reduced Total debt by $31.0 million to $369.0 million and increased cash by $3.8 million to $25.0. As of June 30, 2009, the Company's ratio of Funded debt to EBITDA was 2.29 times, well within the covenant in its credit facility, which requires that this ratio not exceed 3.00 times. For additional information about EBITDA and Funded debt (which are non-GAAP measures), please refer to the reconciliation and other information included in the attached schedule.

Stifel Nicolaus raised their target on the stock this morning to $18, as they're impressed with operating metrics despite a tough retail environment. They see a strong rebound once the economy recovers.

Wedbush Morgan sees less upside, with a target of $14. They like the firm's focus on consumer research in regards to how they build their product pipeline, as well as new marketing programs and international expansion efforts. Still, they view the stock as fairly priced.

I tend to agree with Wedbush -->> even if I up 2010 earnings per share to 1.00 (street is at 89cents), I get to Free Cash Flow of $104million, which is a FCFY (Free Cash flow Yield) of 10%. That's certainly not a bad yield, but this company peddles expensive discretionary products that (in my view) are vulnerable to a permanent "trade-down" effect(affect?) from consumers toward cheaper options. A better (lower stock price) entry point would have me more interested.

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