Wednesday, February 15, 2006

Kiss Temper-Pedic Goodnight

One of Temper-Pedic's (TPX) early investors, Friedman, Fleischer & Lowe recently distributed all of its 5.8 million Tempur-Pedic shares to its partners.

Now there's a vote of confidence.

Tempur-Pedic manufactures premium visco-elastic foam mattresses sold through 5,300 furniture/bedding outlets.

Strong demographics and healthy margins aside, we don't like this company.

First, the good: Tempur-Pedic's proprietary technology thwarts off rivals. The premium segment TPX operates in should continue its rapid growth as aging baby boomers blow their IRAs on upscale sleeping products.

The bad: shareholders have little say on where this company is headed -- it is mostly run by a bunch of private equity guys.

Because retail is TPX's primary channel -- and the mattresses are by no means cheap -- a dip in the economy could leave Temper-Pedic coughing in the dust.

Looking at the balance sheet, Tempur-Pedic has $345 million of debt and $18 million in cash.

The ugly: TPX's competitors are impinging on its niche mattress -- unless TPX mixes up its customer offerrings, this stock will fall out of bed even further as market share erodes and the risks of new technology chew through TPX'S already vulnerable position.

TemperPedic was a great stock to own from 2000 to 2003 -- today, sales are decelerating and the stock should be dumped.

Heavy promotion of visco-elastic models from competitors makes us lose sleep: does Temper Pedic have a competitive advantage one could call real?

The answer is no. We're bears with an $8 price target, unless TPX surprises us by aggressively penetrating new growth channels.

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