Tempur Sealy International Stock Is Believed To Be Significantly Overvalued
- By GF Value
The stock of Tempur Sealy International (NYSE:TPX, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $38.56 per share and the market cap of $7.6 billion, Tempur Sealy International stock appears to be significantly overvalued. GF Value for Tempur Sealy International is shown in the chart below.
Because Tempur Sealy International is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 12% over the past three years and is estimated to grow 11.72% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Tempur Sealy International has a cash-to-debt ratio of 0.13, which is worse than 89% of the companies in the industry of Furnishings, Fixtures & Appliances. GuruFocus ranks the overall financial strength of Tempur Sealy International at 4 out of 10, which indicates that the financial strength of Tempur Sealy International is poor. This is the debt and cash of Tempur Sealy International over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Tempur Sealy International has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3.9 billion and earnings of $1.973 a share. Its operating margin of 15.18% better than 86% of the companies in the industry of Furnishings, Fixtures & Appliances. Overall, GuruFocus ranks Tempur Sealy International's profitability as strong. This is the revenue and net income of Tempur Sealy International over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Tempur Sealy International's 3-year average revenue growth rate is better than 81% of the companies in the industry of Furnishings, Fixtures & Appliances. Tempur Sealy International's 3-year average EBITDA growth rate is 19%, which ranks better than 78% of the companies in the industry of Furnishings, Fixtures & Appliances.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Tempur Sealy International's ROIC is 18.67 while its WACC came in at 11.54. The historical ROIC vs WACC comparison of Tempur Sealy International is shown below:
In short, the stock of Tempur Sealy International (NYSE:TPX, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 78% of the companies in the industry of Furnishings, Fixtures & Appliances. To learn more about Tempur Sealy International stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
