What to Look For Following Tempu-Pedic’s Nose Dive

by Investing Daily
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Submitted by Investing Daily as part of our contributors program.

By: Chad Fraser

Shares of specialty mattress maker Tempur-Pedic (NYSE: TPX) recently went into a free fall after the company sharply cut its sales forecast.

The news sliced the stock’s price by 48% on June 6, the day of the announcement, from $43.67 to $22.39. And the drop still had further to go: Tempur-Pedic bottomed out at $21.17 on June 7 before turning up slightly, to today’s level of $23.00.

Part of the reason for the decline was that it came on the heels of record sales and profits in the first quarter.

Rising Competition Is Putting Pressure on Tempur-Pedic

In the company’s announcement, it said that it expects its overall sales for the current quarter to come in 3% to 5% below the same period a year ago, led by an 8% decline in North America. As a result of the sales drop, Tempur-Pedic now forecasts a 50% drop in earnings per share for the quarter.

For the year, Tempur-Pedic now expects sales to be flat, at $1.43 billion, down from its earlier forecast of $1.6 to $1.65 billion.

CEO Mark Sarvary explained the reduced guidance this way: “Sales trends in our North American business during the second quarter have been disappointing and below plan, primarily due to changes in the competitive environment, including an unprecedented number of new competitive product introductions, which have been supported by aggressive marketing and promotion.”

Tempur-Pedic Shares Tumble; Insider Buying Jumps

The news was undoubtedly grim, but in the following days, company management made two key moves that could point to better times ahead for Tempur-Pedic’s shareholders.

For one, insiders took advantage of the price drop to snap up Tempur-Pedic stock. According to Forbes, the biggest purchase was by director P. Andrews McLane, who bought 112,000 TPX shares for $2.8 million. That works out to an average cost of $25.02 a share.

In “Corporate Insiders Are Bullish and Buying Stock,” Investing Daily editor Jim Fink took a look at the relevance of insider buying and found it to be an indicator worth paying attention to. That’s because insiders know their companies better than anyone else and are thus well-positioned to see an upturn in their business coming. In addition, being personally invested in the company enhances a manager’s effectiveness, as Fink writes:

“If you want to learn how to pick great stocks, look for companies heavily owned by insiders. A corporate manager that has her personal financial interest aligned with shareholders is more likely to maximize shareholder value than is a manager who simply collects a salary.”

Another key factor to keep in mind when studying insider buying is the position of the manager purchasing the stock: CEOs and high-level managers (including directors) often have a more comprehensive view of a company than a middle manager, who is more likely to be focused on just one department.

Timely Buyback Shows Tempur-Pedic Is on the Ball

Another smart move management made was to use the $200 million that it had set aside for share buybacks to repurchase Tempur-Pedic stock during the plunge.

Buybacks help push up a company’s share price, because they reduce the total number of shares outstanding, thereby increasing the value of each remaining share.

Further, by repurchasing stock during a decline, Tempur-Pedic was able to get more bang for its buck. A long-time knock on buybacks has been that management tends to buy back too many shares when prices are high and then cut back on repurchases when prices decline.

The classic example of this came in the third quarter of 2007, when S&P 500 companies repurchased a record $172 billion of their stock with the market near an all-time high. They then slashed their buyback spending by more than 85% during the market plunge, to just $24 billion in the second quarter of 2009.

In the end, Tempur-Pedic will need a series of quick, successful product launches to keep—and grow—its share of the specialty mattress market. But by buying in personally and making timely share repurchases, management is showing that it’s serious about competing.

Article originally posted here.

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