June 28, 2010 - Tempur-Pedic International Inc. (TPX-NYSE) manufactures, markets, and sells bedding products worldwide. Its products include pillows, mattresses, and adjustable beds, as well as various cushions and other comfort items.

Tempur-Pedic got hit in 2008. Earnings were down to 94 cents a share, from $1.74 in 2007. But last year, things turned for the better. The company made $1.12 a share. This year, 12 analysts see $1.84 (with a range of $1.70 to $1.92) which would be a new record, then next year $2.19 (with a range of $1.96 to $2.45). Second quarter earnings should be out in July and expectations are for 41 cents, almost double the 22 cents of last year's second. For the third quarter, look for 51 cents, well ahead of the 34 cents of last year's third.

Revenues declined for two years straight, starting in 2008. They went to $928 million, down from $1.107 billion in 2007. Last year, sales dropped again to $831.2 million. (But earnings rebounded.) This year, analysts see a 27% improvement to $1.05 billion, then another 11.6% boost to $1.18 billion in 2011.

First quarter got off to a good start, showing 44 cents a share, 42% above the consensus estimate of 31 cents and much greater than the 18 cents of the first quarter last year. In fact in the previous 4 quarters, earnings beat expectations each quarter with a range of 2.7% in the last quarter of 2009 to a high of the 42% in the first quarter of this year. Sales also improved in the first period by $22 million dollars to $254 million. Operating and profit margins also showed improvement.

Part of the success is credited to new products like TEMPUR-Cloud, a collection designed for consumers preferring a softer mattress. With 3 different models (good, better best), there's one that fits every budget and preference. The new collection has given the company more floor space in retail shops which should help market share.

With slower sales in the last 2 years, there's unused manufacturing capacity waiting for more orders. As the economy improves, expect margins to increase as much of the fixed cost of these facilities will be a smaller portion of sales. There should be some price hikes as well to help improve the bottom line.

The board of directors likes this stock, even as it almost hits its all-time high of $37.90, reached in 2007 (before it tanked to $5 a share in 2008, then hit $3.80 in early 2009 before rocketing to its current level). The board voted "yes" on a $100 million stock buyback which replaces the recently completed stock repurchase program. If enough stock is bought, expect earnings per share to get even better.

The only red flag that's waving is debt. It's $399 million which is 78% of capital. That's fine for now as rates remain low. But if rates rise quickly, which is always a possibility, expect more of earnings to go to interest payments. Of course, when times are good that leverage makes earnings even better. It's one of the reasons the company shows a 107% Return on Equity.

While this stock has rocketed in the last year, it is below its recent high by 20%. Valuations are still above a comfort level for most investors. But the company has proven itself worthy of consideration as it righted its ship during the recent economic storms. With new products, better market share, higher prices, and a strong stock buyback program, the company seems to be doing almost everything right. Maybe it will even start to pay off some debt. Now that would make it almost too compelling.

- Company Web site: www.tempurpedic.com

Ted Allrich