Users: gnc: Tempur-Pedic No Bargain Even After Plunging on Weak Guidance - Barrons.com

Talk about a shareholder nightmare.

In late Wednesday morning trading, Tempur-Pedic's stock was down more than 40% after the specialty mattress maker forecasted a disappointing second quarter.

Tempur-Pedic (ticker: TPX) said North American sales are running below expectations, and it is now guiding for second-quarter earnings per share to tumble 50% from a year earlier, when it posted a profit of $53.1 million, or 76 cents a share. The company also expects revenue to decline 3% to 5% from the $342.2 million in the year-ago period. Analysts had forecast earnings to rise to 85 cents on revenue of $394 million.

Although the news dragged down the entire mattress sector, Tempur-Pedic felt the most pain, falling 46% to a recent $23.53. However, we think the stock could sag further.

"It appears that competition caught up to Tempur-Pedic much faster than we expected in the specialty bedding segment, which calls into question the company's brand," wrote S&P Capital IQ analyst Jim Yin in a note today, downgrading the stock from Buy to Hold. "We expect Tempur-Pedic to lose market share in the specialty segment." Yin also lowered his price target from $59 to $31.

Nor does the problem look to be a short-term issue. For the full year, Tepur-Pedic said it now expects 2012 per-share earnings of about $2.70 on sales of $1.43 billion, compared with its prior view for $3.80 to $3.95 and $1.6 billion to $1.65 billion, respectively. Analysts had been expecting the company to earn $3.94 a share on $1.65 billion in revenue.

"In 2012, it is clear that the competitive landscape within the foam category has changed dramatically, and new entrants are now taking share from Tempur-Pedic," according to KeyBanc Capital Markets analyst Bradley Thomas, who also downgraded the stock from Buy to Hold on the news. "For the foreseeable future, we believe an increasingly competitive landscape will pressure fundamentals and weigh on investor sentiment."

Barron's was bearish on Tempur-Pedic just last month, warning of a likely end to market-share growth. (See Barron's Cover, "Sex or Sleep?," May 14.) The stock has fallen 55% since then.

Tempur-Pedic had recently been benefitting from incremental improvements in the housing sector and spending in the high-end of the market.

Still, while the company's offerings aren't the priciest, spending at least $3,000 on a mattress is certainly a splurge for most people. Moreover, competitors like Sealy (ZZ) and Select Comfort (SCSS) have also been entering the arena with their own specialty products, including memory foam and adjustable firmness.

In recent trading, Sealy was down 6.7% to $1.59 and Select Comfort was off 17.4% to $21.42.

Stephens analyst Eric Hollowaty, in what now looks like a very prescient move, recently downgraded Tempur-Pedic from Overweight to Equal Weight. His caution was due to the Street's overly aggressive earnings estimates, as well as a difficult promotional pricing atmosphere that 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?"

Trading at just five times forward earnings, Tempur-Pedic's stock can't be called pricey at their current levels. Still, the company's 15% long-term earnings-growth rate lags the industry median and shares don't pay a dividend.

As S&P's Yin notes, the company's valuation should shift "towards the lower end of its historical range as we narrow its premium to peers amid greater competitive pressure."

All of which makes us think that bargain hunters chasing Tempur-Pedic won't rest easy.

E-mail: teresa.rivas@barrons.com