Tempur Sealy Is Taking Market Share In A Weak Bedding Environment

Even amid a tough retail environment, there are still some bright spots.

Stifel said in a note Tempur Sealy International Inc TPX is recapturing market share quickly from the fallout after the Mattress Firm Holding Corp debacle.

Accordingly, the firm upgraded shares of the company from Hold to a Buy, with the price target revised upwardly from $60 to $80.

At time of writing, Tempur Sealy shares were rallying 1.93 percent to $62.70.

Considerable Momentum Exists

Analysts John Baugh, Dillard Watt and Paul Betz said the margins of this recovered business are higher than they had modeled previously. The analysts think Tempur Sealy has considerable momentum, heading into the back half of 2017 and into 2018.

"We have always believed that the Tempur-Pedic and Stearns & Foster brands are powerful and we view the Mattress Firm/TPX divorce as a great test of this theory," the firm said.

"So far, the indications point heavily in the favor of TPX."

See also: Cuddle Up To A Position In Tempur Sealy Shares, Says Piper Jaffray

Stifel said it is now evident that investors will measure Tempur Sealy's success on sequential progress and not on year-over-year sales and earnings. Though the scepter of difficult year-over-year comparisons loom through the first quarter of 2018, the firm believes investors appear to be focused on pro forma or without Mattress Firm sales and earnings.

On that measure, the firm noted that North American revenue growth for the third quarter is guided above 17 percent, the increase which it experienced in May and June.

Soft Bedding Market

Meanwhile, the firm noted that the bedding market environment remains weak. The firm believes this will provide less tailwind for the company and accentuates what it thinks will be sizeable market share gains on a pro form basis, excluding Mattress Firm, for the rest of the year and into 2018.

"In an industry that is struggling to find retail traffic and remains under pressure from bed-in-a-box growth and ecommerce growth in particular, TPX's results should look that much better," the firm said.

Detailing, the road to substantial earnings growth, the firm said it believes EBITDA of $650 million on the current business is attainable in 2020. The firm sees the potential for an incremental $20 million to $25 million of EBITDA, as the Asian joint venture has a call option that is likely to be exercised in 2020.