Sealy's ( ZZ) short life as a public company has been restless. The stock closed Tuesday at $14.80 a share, up almost 14% over the past two months. But at current levels, Sealy remains 7.5% below its April IPO price. In fact, the company joins other consumer brands like Hertz Global ( HTZ - Get Report) and Burger King ( BKC) that have struggled after going public in 2006. One common point shared by all three companies is that they were previously owned by private capital firms -- but more about that later. Sealy is the largest maker of bedding products in North America, and at current levels, the stock trades at just 13 times expected fiscal 2007 (ending November) earnings of $1.13 a share. This compares with 13.9 times forward analyst estimates for competitor Tempur-Pedic ( TPX - Get Report) and 16.8 times for Select Comfort ( SCSS). With that in mind, I'm here to answer investors' questions: Should I do it? Is now the time to snap up some shares in Sealy or should I leave them well enough alone? The company posted fiscal third-quarter (ended August) results Oct. 11. Sealy earned 30 cents a share, which was in line with the consensus analyst estimate. Overall, revenue grew 6.5% year over year to $415 million, led primarily by international sales. Sealy's domestic business was hurt by a competitive pricing environment.
In addition to its Sealy flagship brand, the company also sells mattresses under the Basset & Stearns and Foster names. The company is also spending $25 million to update 80% of its product line, ahead of new fire-resistant bedding rules that come into effect in July 2007. Sealy was the first in the industry to begin making the transition and has lost market share in recent quarters as its competitors have been cutting prices.
Sealy also announced its first 7.5-cent quarterly (2% yield) dividend in June. The company has made two payments already, and I expect management to announce its next dividend in January. According to Bloomberg, investment firm Kohlberg Kravis Roberts still owns a majority of Sealy and stands to receive $14 million a year from the dividend. Another remnant of the company's former private capital owners is a heavily levered balance sheet (debt equals 87% of total assets), which sports $796 million of long-term debt. That said, it's worth noting that CFO Jeffrey Ackerman bought 1,000 shares of Sealy Oct.17; arguably, no one is in a better position to know the current strength of the company's finances than the CFO. Director Gary Morin also purchased 5,000 shares on the open market in July. At the end of the day, yes, I believe that readers should consider buying Sealy at current levels. The stock has been discounted in post-IPO trading because of its private capital past. I believe management will be able to win back market share in the coming quarters as the company's competitors will have to raise prices to offset the cost of transitioning their own products to meet new fire-resistant rules. Sealy could also benefit from a weaker dollar in the near term, as 23% of its sales were overseas in the most recent quarter. With that in mind, the stock could trade up toward the high teens by next summer.