Bed Buds: Tempur-pedic Downgraded, Sealy Up As Investor Seeks Change

Shares of Tempur-pedic slid following a Raymond James downgrade, while shares of competitor Sealy got a rise on news that its second-largest shareholder is unhappy about debt and the dominance of KKR.

Shares of Tempur-pedic International (TPX), down 82 cents or 1%, to $81.50, are trading at 20.1 times Raymond James’ estimated earnings for 2012 of $3.90 per share, and nearly 18 times its 2013 estimate of $4.60. The company doesn’t pay a dividend. Raymond James downgraded Tempur-pedic to Market Perform from Strong Buy, and removed its target price of $79.

Shares of Sealy (ZZ) rose 6.8%, or 12 cents, to $1.88. But shares are well off their 52-week high of $2.99; the company has a market capitalization of $184 million. KKR bought Sealy in 2004 for $1.6 billion and owns 46% of common stock; Sealy has reported long-term debt of between $750� million and $840 million since going public, the Wall Street Journal reported Sunday.

The Journal reports that the second-largest shareholder in Sealy, H Partners Management, wrote a letter to the board, complaining that private equity firm KKR, which owns a 46% stake in Sealy, has missed opportunities to expand and extracted heavy fees in the interim despite high debt levels.

The WSJ story outlines H Partners’ seven demands; it owns 14.5% of shares, and wants its own representative and more independent directors on the Sealy board.

Tempur-pedic is a much larger operation, and boasts a market capitalization exceeding $5 billion. Prospects for sales and earnings are excellent, but the stock looks expensive compared to historic valuations and sentiment may have reached a peak, says Raymond James in its downgrade . Tempur-pedic recently introduced a more moderately-priced mattress line, Simplicity. But the beds are still in the premium category.

Writes Raymond James analyst Budd Bugatch:

”We worry about potential disappointments (real or perceived) related to Simplicity sell-through and the specter of rising chemical costs …. it seems best to take a rest and for the time-being, put our recommendation to bed.”

Tempur-pedic guidance is for $8.00 in earnings per share by 2016. That’s way in the future, but the stock wouldn’t look expensive today if that kind of profit is possible.