OK guys, I have just analyzed the financials for Sealy, and done a quick projection of what the future looks like.
After the dilutive refinancing of last year, I can't see how Sealy will ever earn more than about 5-6 cents a quarter... even assuming an increase in quarterly sales from the current $332M to $400M. Last year, the refinancing resulted in major dilution, plus increased interest expense. Even with cost cutting, the numbers just don't add up.
Optimistically, at $400M in quarterly sales, and assuming about a 40% margin, they will make about 6 cents a share, or 24 cents a year. The stock price is $3.31, or a P/E ratio of 13.
But this assumes a major increase in sales. I like their mattresses, but I don't see the justification in valuation. Please help me understand why the valuation is justified. They'll never be worth $18/share again because of the dilution, but I'm having a hard time seeing why they're even worth $3/share.
I like ZZ, with due respect to your post as it was well written. I think the bedbug epidemic sounds like grasping at straws nonsense.
I have read the same news reports but just don't see it as a way to improve sales. Bedbugs have been around for hundreds of years and its hard for me to believe that all of a sudden there is an epidemic ;)
I do feel that mattress sales will pick up with a better economy though, then ZZ will make some big moves. For the long term this is a good buy, but it will take some time yet.
There are a couple of factors to take into consideration. The revenues may expand for two reasons. The first is economic expansion - current sales are very low due & arguably at the bottom of the cycle. The other is replacement demand due to the widespread bedbug infestation across the US. This creates a 'non-optional demand' - if you have bedbugs at home - you're buying a new mattress, right away.
As Serta and Simmons are now in private ownership, Sealy is really the only way to 'play' the bedbug epidemic. It is a crying shame to have to make money off of someone else's misery - hopefully crying all the way to the bank.
Bottom line expansion will be driven by the rising sales and by lower interest costs. First off, management is committed to paying off debt with the free cash flow and that has been quite good. Lower debt means lower interest costs. Second, the rate of interest they are paying is very high - above 10%. This is due to to their previous poor financial position. As they recover, they will roll-over the remaining debt - at much lower rates. So interest costs will fall.
By putting these factors into my projections, I think they can get free of debt in 3 - 4 years. This brings the bottom line up to circa $150MM and the eps to $0.50 (on a totally diluted basis). At that point a 20 multiple on a "turnaround story" becomes reasonable and hence a $10 price target.
That's my arguement for a 4X price appreciation over 3 - 4 years - a good return, even by Buffett standards.
Well, I see nobody responded to my thoughtful, in-depth research of the value of ZZ. I spent about half an hour analyzing those financials! I came to the conclusion that it was too cheap at 2.48, and too expensive at 3.50.
ZZ has great products, but a horrible debt structure. I will buy back in if it gets somewhere around 2.75 or so. However, its currently trading at about 3.05, and I believe it's fairly valued.
I currently have no position in this stock, and feel very fortunate to have gotten out with a 42% gain in 2 months.
Thank you for your insight.. I did mistake of buying at 3.48. I should have spent half hour and should have waited.
Ok, Can you please tell me what is your bible for analyzing? Do you have any books recommendation.
Thanks again.. Hope i will squre-up and move on.. instead of waiting it to recover at 3.48.
In light of your analysis, what do you think of the announcement
Sealy Corporation Announces Intention to Redeem $35 million of Senior Secured Notes
I continue to see Sealy cutting personell costs at corporate which is encouraging. The debt load last time i looked did seems like a mountain.
After your analysis, doesn't it make $2.75 a marginal investment? I do think they have loyal customers and likely are now in the turn-around mode with good product introductions.
Time will tell.
Thanks for posting, this board is lonely!!