Dodged a Bullet: TPX Craters, Down 22% intraday


Well I’m happy to say I was fully out of this weeks ago at my average cost (around $32.50)

Adjusted EPS were in line but Revenues down 9% shows the slide is still hastening. They’re expected to be only slightly off ($1.4B in rev full year vs. $1.43B previously expected)

The problem is not valuation or even the industry – I think mattresses will continue to be sold brick and mortar (can’t test “comfiness” online) – the problem is DEBT.

TPX was already highly leveraged and they chose to buyout another highly leveraged, low margin, barely profitable company. The synergies of 40m 3 years out do not justify this increased debt burden. Consequently they aren’t going to be able to reinvest at the bottom of their industry’s cycle, and they’re going to miss opportunities while they’re held back servicing this debt.

“bringing the debt of the combined company to around $1.5 billion. This is about 9 times the company’s estimated earnings for this year (assuming no contribution from Sealy, which is barely breaking even).

It’s possible that the combined company will benefit from synergies and scale, but it’s no sure thing. The obligations the combined companies owe, however, are a sure thing.” – Saj Karsan

“At the end of the day, I believe the combined company to be a less attractive business. Further, the combined company will have a pro-forma debt to EBITDA ratio of about 4.0x. Pro forma TPX will be a leveraged business as the transaction strains what was once a rock solid balance sheet. Despite management denying the need or desire for TPX to issue any equity to finance the transaction, don’t be surprised if further stock price appreciation tempts them to do just that.” – Michael McCloskey

This will likely trade the gap a little bit but for the most part I think you’re gunna get a chart similar to HPQ on this one (I know from experience how that one feels! that’s one where I DIDN’T get out in time).

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