Stock Market Ideas

#8 Sleep Number Beds Might Be An Investment In More Than A Better Nights' Sleep

May 04, 2020 Ted Vailas Episode 8
Stock Market Ideas
#8 Sleep Number Beds Might Be An Investment In More Than A Better Nights' Sleep
Chapters
Stock Market Ideas
#8 Sleep Number Beds Might Be An Investment In More Than A Better Nights' Sleep
May 04, 2020 Episode 8
Ted Vailas

There are a few things that look interesting about the Sleep Number Corporation after is has fallen quite a way from its February highs.  On the other hand, the price has come back up quite a lot, although historically it may still be undervalued.  There is a need for further research, but a preliminary look at this company is worth a glimpse.

Support the show (http://www.stockmarketideaspodcast.com)

Show Notes Transcript

There are a few things that look interesting about the Sleep Number Corporation after is has fallen quite a way from its February highs.  On the other hand, the price has come back up quite a lot, although historically it may still be undervalued.  There is a need for further research, but a preliminary look at this company is worth a glimpse.

Support the show (http://www.stockmarketideaspodcast.com)

speaker 0:   0:00
Welcome to Episode eight Let's Talk About Sleep Number Corporation. Welcome to the Stock market Ideas podcast, where we discuss value investing and long term investment ideas. Make sure to subscribe and you'll get all of our most up to date episodes with investment ideas you should be thinking about. Here's your host, Ted Violists. Thank you so much for taking the time to join me for this episode of the stock market Ideas podcast. Today we're gonna talk about Sleep Number Corporation and what you've probably seen on TV with their advertisements for the sleep number bed and its variety of mattresses that adjust in firmness and softness at the touch of a button. Sleep number recently beat expectations for earnings and revenue, which was seen as a very good sign for the company. It has also taken steps recently to reopen a number of stores after the pandemic forced it to close locations. As with many other companies that had to close physical locations, this company has followed a similar share price roller coaster. Too many other companies with all time highs being as recently as this past February at almost $60 a share to a low of almost $15 a share of the beginning of April and having bounced back from that almost 100% from that level to just under $30 a share. So while in hindsight, we might think it might have been a whole lot better to buy this company at under $16 a share, there's still a possibility that it is historically undervalued just based on the fundamentals. And this still could be an opportunity to buy this company as a long term investment if we start off by looking at financial strength and some of the indicators on sleep numbers, financial strength. Up until the past couple of years, this company actually had little to no debt and had a very strong financial position. But at some point over the past couple of years 2018 and 2019 specifically, it took on a whole lot more short term debt, and this is something that I won't dive into too much. But it's possible that management decided that this was part of its growth strategy and that funding and a expansion of the company required quite a bit more borrowing. This may also have a lot to do with the acquisitions that this company has made over time. But overall this company does seem to be ableto handle this level of debt, and this could end up being a positive as long as the company does see a return or some net positive effects from paying the interest on this amount of debt. Overall profitability does seem to be quite strong, with gross profit margins having maintained over 60% going back at least 10 years and net profit margins also keeping quite a steady pace between 4.5 to 5.5%. There is also a pretty decent level of growth happening with this company having seen an increase in revenue of over 10% year over year. That in conjunction with pretty strong share buybacks has also given us very strong earnings growth. So it is worth mentioning here that there was a decent amount of insider selling in and around February of this year, but this does seem to coincide with the highs in price per share for this company, so it's not overly unusual to see insider selling and we don't always think that this is going to be a negative sentiment against the company because overall value investors see that insiders could be selling for a variety of reasons, including just the fact that they need some more cash. On a personal level, buying is usually the more interesting thing, which we have not seen yet for this company. But we will keep an eye to see if insiders air going to start buying this company as well, because that could be a strong bullish indicator to show that they have the confidence in the company to buy the shares themselves. I want to talk a little bit about valuation as well as margin of safety for this company and where it sits with its stock price right now. So it's just below $30 a share, and it does show us a P E ratio of around nine. Always keep in mind with the P E ratio that it is looking back at previous earnings. So as I mentioned, this company did beat expectations on earnings, which is fine enough. But with social distancing and the effects of the global pandemic, we still have yet to see the full effect of what customers might do differently when purchasing a mattress or purchasing a bed. And these changes will obviously affect how this company performs. Going forward obviously headed into a recession. Many people would make the case that consumers will not be investing in a brand new, high tech, expensive bed. But on the other hand, you could also make the case that people will want to spend a little bit more toe, have the luxury of a really nice bed that they've always wanted if they're going to defer other large purchases, such as vacations or other expenses that they put off this year. At the end of the day, having a place to sleep is a necessity in most people's minds. So I can say with pretty fair confidence that I don't think as many people will treat this as a luxury purchase as much as they would some other purchases that they will defer this year. Looking a little closer at price to earnings, we can also look at the price to earnings overgrowth ratio, otherwise known as the peg ratio. And this simple calculation also factors in the growth of a company because any time you're looking at a company that's growing a lot faster than other companies. You can expect a lot more investors to be buying this company and for that price to earnings ratio to be higher as people are owning this company expecting more growth. So sleep number shows us a peg ratio of around 0.49 which is very low. But again, it's very important to consider here that a lot of this data is looking backward. So we have to come to our own conclusions about what we think this company is going to do in terms of growth. The short term outlook for this company may very well be negative. But looking past the pandemic, it's important to try to make a judgment as to whether or not the company can come back to a normal place and continue the type of growth and profitability that it has seen in the past number of years. In this case, this company does show us a very decent valuation under the DCF, or discounted cash flow calculation. If it were to continue a growth rate of around 10% over the next 10 years, then by subtracting the tangible book value, which in this case is a little bit negative. We still see a margin of safety just over 26%. So what this tells us is that even if this company slows down in terms of its growth over the next 10 years, it could very well still be undervalued at today's price. The reverse DCF gives us a similar result telling us what an appropriate growth rate is, and in this case it's just a little over 6% for inappropriate growth rate at today's price. So overall, what we can tell from this company is that we probably are looking at a very good quality business that has very strong future prospects. And if it continues to make its customers happy and to innovate on the product line that it offers should have a good future of growth and earnings and profitability head of it, It's quite impossible to tell what's going to happen in the short term and whether or not the effects of the recession and the pandemic are going toe hurt this business in the long term. So a few items here are worth doing a little bit more in depth research on to come to that decision, but overall, this could very well be a good entry point into an investment that you want to hold for the long term. So I hope you found this very helpful and interesting. Thank you again for joining me. And I hope you have a fantastic day. Talk soon. Bye. For now, to make sure you get our most up to date stock market ideas, be sure to subscribe, rate and review this podcast. Thank you for listening to another episode of stock market ideas.