Mattress Firm -- Don't Sleep on Its Expensive Stock, Weak Organic Growth

NEW YORK (TheStreet) -- Specialty bedding retailer Mattress Firm (MFRM) has been a darling for shareholders, returning gain of almost 170% since the Houston-based company went public in 2011. This includes almost 100% gains just in the past three year, dominating the broader averages during both periods. For that reason, it's time to consider taking some profits.

Like most young companies, Mattress Firm (founded in 2007) has sought growth my any means necessary, including picking off a string of companies that has helped MFRM deliver sales that are still growing at astonishing rates, including a 92% surge in the fourth quarter. While the company still has some runway for growth, investors should pay attention to how much of that growth is organic.

Fast-growing business can't maintain their growth rates indefinitely, much less levels of above 50%. At some point, Mattress Firm will run out of companies to buy. And the company will then have to rely on its underlying business, or the part of the operation that can make money on its own absent of M&A deals and other exterior factors. As evidenced by the recent spike in MFRM short interest, some investors don't think the company can do it.

Meanwhile, there is nothing about MFRM shares today that scream value. Sure, the stock -- up just 1.7% on the year -- hasn't performed as well as it has in the past. But at 46 times earnings, against a 21 P/E for the S&P 500, there is still a lot of implied growth built into these shares.

Even when paired with another expensive competitor, like Tempur Sealy International (TPX), which carries a P/E of 35, the premium in Mattress Firm shares stands out even more. Ahead of the company's fiscal first-quarter earnings due out Wednesday, it makes sense to take some profits off the table and wait to hear what the company says about its business outlook for the rest of the year and next.

Why? As evidenced by the recent reduction in the average analysts estimate, the confidence needed to own an expensive stock into earnings is not there. Just in the past three months, the average analysts estimate for the just-ended quarter has fallen three times.

When the quarter began, the average earnings estimate stood at 46 cents per share. Two months ago, it fell 6.5% to 43 cents. Last month, the estimate stood at 42 cents. And just in the past seven days, the estimate has fallen to 40 cents from 41 cents.

In total, the earnings-per-share number has dropped 13% since the quarter began. But MFRM stock is down just 3% in that span, suggesting that expectations implied by the high P/E have not been fully reflected in the stock. With shares trading around $59, MFRM stock still trades (at least) $7 above these reduced estimates.

Considering that average analysts full-year 2015 earnings projections of $2.63 is now down 5% from $2.77, the best case scenario is that MFRM stock should trade down from around $59 per share by 5% to around $56.

Granted, a 5% decline in the stock won't lower the P/E a great deal. Still, for investors thinking of buying MFRM here, it highlights not only how expensive these share are, it also underscores what Wall Street thinks the company can actually deliver. So for current investors, take some of the 34% 12-months gains off the table and live to play again.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

More from Opinion

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook

PayPal Strikes Again, Facebook, and AT&T -- 3 Tech Stories You Must Know

PayPal Strikes Again, Facebook, and AT&T -- 3 Tech Stories You Must Know

How to Invest Like Warren Buffett

How to Invest Like Warren Buffett

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites