For Immediate Release
Chicago, IL – January 9, 2020 – Zacks Equity Research Shares of Tempur Sealy TPX as the Bull of the Day, Fiat Chrysler Automobiles N.V. FCAU asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Spotify SPOT, Apple AAPL and Amazon AMZN.
Here is a synopsis of all five stocks:
Bull of the Day:
Tempur Sealy’s shares have soared over 80% during the last year to crush its industry’s average and the S&P 500. The mattress powerhouse returned to sales growth in 2018 and its expansion looks poised to continue as it proves it’s ready to fight off challenges from digital upstarts through its own direct-to-consumer expansion and more.
Tempur Sealy is one of the world's largest bedding companies that offers everything from mattresses to pillows, under different brands, which include Tempur, Tempur-Pedic, Sealy, Cocoon by Sealy, and Stearns & Foster. The company, which makes over 80% of its revenue in North America, has ramped up its digital and direct-to-consumer business in the Amazon age to help better compete against online-based newcomers such as Casper.
Tempur Sealy topped our Q3 earnings and revenues estimates, with adjusted earnings up 28% and sales up 12.5%. Both TPX’s top and bottom line expansions marked the sixth consecutive quarter of growth for the firm, after it saw a downturn between the second quarter of 2017 and Q1 2018.
More specifically, direct channel sales soared 62% to account for roughly 14% of quarterly revenue, up from around 9% during the third quarter of 2018. This strength helped TPX’s gross margin come in at 43.9%, up from 41.1%. “In fact, during the third quarter we recognized the highest gross profit in the company's history, greater than what was generated previously across a larger presence,” CEO Scott Thompson said in prepared Q3 remarks.
“Our double-digit growth in operating income and adjusted EBITDA allows us to continue investing in our plants, products and people, while repurchasing our stock and strengthening our balance sheet by reducing our financial leverage.”
Investors should note that Tempur Sealy recently began new partnerships with Big Lots and Mattress Firm. The company also opened its 50th Tempur-Pedic retail store in Q3 and management reaffirmed that it could open as many as 150 in the long run.
And one of the firm’s newer offerings, the TEMPUR-LUXEbreeze, recently landed on Popular Science’s Best of What’s New awards list in 2019. The offering helps create a cooler sleeping surface, which could be a hit since the firm claims that “sleeping hot is the number one unmet consumer challenge in the sleep industry -- with more than 60% of Americans struggling with this problem.”
TPX stock is up 82% in the past year to destroy its Retail-Home Furnishings Market’s 24% average climb. This group includes the likes of RH, Ethan Allen and others.
TPX shares are also up 15% in the last three months, but have cooled off recently, which could give the stock some room to run. TPX stock closed regular trading Wednesday at roughly $85 per share. This came in around 8% below its 52-week intraday highs of over $92.
Tempur Sealy’s valuation has become a little stretched on the back of its climb. Still, TPX stock is trading below its three-year highs in terms of forward 12-months sales and earnings. In fact, TPX is trading at 15.1X forward earnings, which matches its three-year median and marks a discount against its 52-week median of 16.2X.
TPX currently holds “B” grades for both Value and Growth in our Style Scores system and rests in the top 9% of our more than 250 Zacks industries. The firm has also returned value to shareholders through buybacks.
Looking ahead, our current Zacks estimates call for Tempur Sealy’s fourth quarter sales to jump 14%, with Q1 2020 projected to surge 17.2%. These would both top Q3’s 12.5% sales expansion.
The company’s full-year fiscal 2019 sales are projected to pop 11.5% to hit $3.01 billion. Better still, TPX’s fiscal 2020 revenues are expected to climb 16% above our current year estimate to reach $3.49 billion. Both of these figures would crush 2018’s marginal top-line expansion and mark the company’s strongest sales growth since 2014.
On the bottom end of the income statement, Tempur Sealy’s adjusted Q4 earnings are projected to climb over 31% to $1.18 per share, with Q1 2020 set to soar 63% higher. Meanwhile, its full-year EPS figure is expected to soar 28.4%. And 2020’s earnings are then projected to surge another 46% to $5.55 a share.
Tempur Sealy has topped our quarterly earnings estimates by roughly 15% in the trailing three periods. Plus, its 2019 and 2020 earnings outlook has climbed significantly since it reported its Q3 results in late October.
Overall, TPX’s recent positive earnings revision trends help it earn a Zacks Rank #1 (Strong Buy) standing. The company’s ability to successfully adapt to the direct to consumer age appears ready to help Tempur Sealy continue to thrive in a business segment that won’t ever go out of style.
Tempur-Pedic landed at No. 1 in terms of customer satisfaction for the retail mattress segment in the J.D. Power 2019 Mattress Satisfaction Report. And consumers are clearly willing to pay for quality when it comes to where they rest their heads at night. This means that investors might not want to sleep on Tempur Sealy stock.
Bear of the Day:
Shares of Fiat Chrysler Automobiles N.V. have fallen 35% in the past two years and its planned merger with Peugeot maker Groupe PSA still awaits regulatory approval. The auto giant’s sales have also slumped over the trailing 12 months and earnings are projected to slip as the auto industry races to spend on the next generation of technology.
What’s Going On?
Fiat Chrysler and PSA officially announced their finalized merger terms on December 18. The deal would create the world’s third-largest auto maker and house Jeep, Ram, Fiat, Peugeot, and more. The merger is designed to help the joint firm better compete globally and adapt to an industry, from Ford to Tesla, that has started to invest heavily in electric and autonomous driving.
The merger must still be approved in both the U.S. and Europe. Executives from the two automotive giants expect the process to take between 12 and 15 months.
Along with the lengthy and uncertain process ahead, investors should note that auto sales face challenges in China and elsewhere amid a slowing global economy. For example, GM recently posted its biggest-ever sales drop in China last year and warned that 2020 could be rough as well.
Plus, U.S. light-duty vehicle sales slipped 1.6% in 2019, according to Edmunds. Meanwhile, the likes of Uber and other ride-hailing firms have disrupted the industry.
In terms of Fiat Chrysler, the company’s sales have slipped roughly 9% in the trailing 12 months. FCAU stock is also down roughly 10% during this same stretch, which lags its broader industry’s 11% climb and the S&P 500’s 24% jump.
Fiat Chrysler’s valuation is solid at the moment as it trades at a discount against its industry’s average (5.1X vs. 8.7X). However, the stock has traded as low as 4.3X forward 12-month Zacks earnings estimates over the last year.
FCAU’s Automotive – Foreign industry currently rests in the bottom 40% of our more than 250 Zacks industries. FCAU stock is also trading below its 50-day moving average. Plus, our estimates call for the firm’s full-year earnings to fall nearly 23% this year and another 5.2% next year.
Fiat Chrysler is currently a Zacks Rank #5 (Strong Sell) based on its recent negative earnings revision trends. With that said, interested investors might want to keep an eye on the firm as it tries to complete its PSA merger.
Time to Take a Second Look at the Music Streaming King
Spotify has not performed as well as initial investors expected since its direct listing in April of 2018, but it’s on its way up. SPOT has gained 24% since its strong Q3 earnings at the end of October, and I think this rally has legs. The stock is trading at the lower end of its forward P/S trend and below the broader market. I believe now is an excellent time to put a long term position on the music streaming king.
Spotify’s big bet on podcast looks like it is beginning to pay off, with 39% quarter-over-quarter growth in podcast hours streamed. This exponential growth in podcast engagement will continue to drive more conversions from ad-supported users to full paying subscribers.
The music streaming leader has been building out its podcast offering this year with three key acquisitions, to rival the podcast king, Apple. Spotify purchased Gimlet, Anchor, and Parcast in the first half of 2019 for roughly $400 million. These acquisitions not only broaden Spotify’s library of podcasts, but it also enables them to improve their original content and enables users to produce and circulate their own podcasts. Taking control of the podcast market would be a big win for Spotify as this market is expecting to be a billion-dollar global ad market in the next couple of years.
As of Spotify’s September quarter, it has 248 million active monthly users (MAUs) and 113 million paying subscribers globally. Paying subscribers bring in substantially larger margins than ad-supported users. The strategy is to initially get customers to try their platform free as an ad-supported customer, then provide the user with a product offering that drives enough engagement for the customer to see the value in purchasing the premium subscription. Spotify has been increasing its MAUs by around 30% for the past couple of years while paying subscribers make up a growing percentage of total users. The dive into podcasts should advance both metrics.
Competition in the music streaming space is steep, but Spotify’s seemingly superior product offering continues to expand its market share. The platform currently adds nearly twice as many paying subscribers every month as its biggest competitor, Apple, according to Spotify’s most recent financial report. It also drives twice as much engagement at half the churn rate (user loss). Spotify is outpacing Amazon music as well, which has a user base that is skewed towards ad-supported users.
Investor’s biggest concern about SPOT is the fact that its competition is just transitioning to service-based business models and will do whatever it takes to control the spaces they are entering. Apple and Amazon both have ostensibly limitless resources. Investors wonder how a pure-play streaming service like Spotify can remain competitive.
Spotify not only has a massive consumer base already, but the company drives a cultural trend for millennials and Gen Z’s. I don’t see them deviating from this movement anytime soon. Competitors will need to take a substantial amount of market share to become leaders in the music streaming space, and at Spotify’s current customer acquisition rate, that doesn’t seem possible.
Spotify is a Swedish company that has gained enormous international traction, now operating in 79 markets. The company has a healthy balance sheet with over $2.1 billion in cash and a debt-to-capital of less than 25%. The company has been able to support growing positive free-cash-flows that will continue to provide Spotify with financial flexibility to expand its business organically and through acquisitions.
SPOT is trading 4% above where it closed its first day on the market and 24% below its all-time high. I am confident that this stock can bounce back as the digitalizing world drives more music lovers to this platform. Spotify is a leader in a growing space and continues to gain market share. Sell-side analysts are growing more confident about this stock after the latest earnings and are projecting an average target price that would represent an over 10% upside.
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