Tempur-Pedic's Big Dreams

The mattress maker is on a roll despite the housing slowdown that is hurting profits for other bedding manufacturers

Tempur-Pedic (TPX) management likes the bedding maker's prospects, and investors are starting to agree.

Its second-quarter earnings report sent the stock 11.6% higher on July 20. Tempur-Pedic reported earnings of 39¢ per share. That's 4¢ above analyst estimates, and 30% above earnings a year ago. Also helping the stock was an announcement that the company will buy back up to $200 million in stock.

This is especially good news, considering the slowdown in the housing market. "Given the recent subprime meltdown and the potential for further softness in housing, we are becoming increasingly convinced that [2007] will be a disappointing year for bedding in general," Canaccord Adams analyst Stephen Colbert wrote Friday.

Tempur-Pedic is apparently stealing market share from its competitors, especially in mattresses. Mattress revenue was up 20%. Unlike other firms, the company isn't relying on hot foreign markets for its sales growth. Mattress sales are up a bit more at home in the U.S. "Simply put, [Tempur-Pedic] is on a roll," wrote CIBC analyst Joseph Altobello in a note Friday. Competition is "manageable" as the firm continues to gain market share.

Getting More Space in Stores

How is the company outshining its rivals? The key may be the technology behind its products, which don't rely on springs.

"Over the long term, we expect to continue to gain market share as we lead the technology shift away from inner springs," President and Chief Executive H. Thomas Bryant said in a statement. He expects the company will "ultimately reach our goal of becoming the worldwide bedding leader." Analysts noted Tempur-Pedic products are getting more space in stores.

The stock buyback is on top of $100 million in shares repurchased since Jan. 25. The firm says it won't need the money for capital expenditures because it just completed a third factory.

Canaccord's Colbert says Tempur-Pedic has a "solid brand" that stands out in a sluggish industry. But, he also raised some cautionary notes for investors. Sales and earnings in the second half of the year may face difficult comparisons to strong results in the second half of 2006, he wrote.

Plus, broader problems with the housing market may still catch up to Tempur-Pedic, especially if housing fails to recover later this year. "We see few signs of improving trends for the industry during the second half of the year and remain cautious," Colbert wrote. (Canaccord seeks to do business with Tempur-Pedic.)

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