Tempur Sealy International, Inc. (TPX) in Lexington, Ky., and Purple Innovation, Inc. (PRPL) in Lehi, Utah, are two popular mattress manufacturers in the United States. TPX manufactures and markets bedding mattresses, adjustable foundations, pillows, and other comforting products and accessories under its own and other brand names internationally. In comparison, PRPL operates as a comfort technology company offering mattresses, pillows, and cushions. Both companies sell their products primarily through third-party retailers, company-owned stores, and e-commerce.

Since the COVID-19 pandemic, remote working has been motivating people to improve the quality of their lives and living conditions. With attractive summer offers and heightened consumer disposable income, in-part due to government rescue spending, home improvement companies have been generating rising sales. Among other products, the demand for soft, comforting, eco-friendly, and durable mattresses is on the rise as people focus more on their health and wellness. The global mattress market is expected to grow at a 7% CAGR from 2021 – 2026. And both TPX and PRPL are likely to benefit from the industry tailwinds.

But while PRPL’s stock price declined by 26.2% over the past month, TPX surged 38.5%. So, TPX is a clear winner with 73.3% gains versus PRPL’s negative returns in terms of the past year’s performance. But, which of these stocks is a better pick now? Let’s find out.

Latest Movements

In an announcement on June 7, TPX said it plans to build its largest manufacturing facility at Crawfordsville, Indiana. The robust business climate fostered by the state and local government, the quality of life, and the property’s access to major transportation routes were the basis of TPX’s choice of  Crawfordsville as the ideal location for its new operations. TPX expects to commence at the facility in 2023 and offer a wide variety of bedding products and components.

On May 27, TPX executed an agreement to acquire Dreams, the leading specialty bed retailer in the United Kingdom. Dreams’ successful multi-channel sales strategy is expected to complement TPX’s existing U.K. operations and accelerate its growth. With this acquisition, TPX’s annualized worldwide direct-to-consumer business is expected to hit $1 billion in sales, and its international segment will represent more than  20% of its consolidated sales.

Following an accident at PRPL’s manufacturing facility, the company  experienced production challenges caused by unanticipated mechanical and maintenance issues, while improving safety and bringing its Mattress Max machines back online. On July 19, 2021, the company announced that it expects to clear  its production and shipment backlogs by the end of August. But 10 weeks of significantly reduced production levels could  impact PRPL’s second and third-quarter revenue.

Recent Financial Results

TPX’s net sales for its fiscal second quarter, ended June 30, 2021, increased 75.8% year-over-year to $1.17 billion. The company’s gross profit has been reported at $518.20 million, representing a 94.9% year-over-year improvement. Its operating income came in at $223.30 million, up 318.2% from the prior-year period. While its adjusted net income increased 294.9% year-over-year to $161.50 million, its adjusted EPS increased 295% year-over-year to $0.79. The company had $58.10 million in cash and cash equivalents as of June 30, 2021.

For its fiscal first quarter, ended March 31, 2021, PRPL’s net revenues increased 52.4% year-over-year to $186.43 million. The company’s gross profit came in at $87.52 million, up 64.6% from the prior-year period. Its operating income has been reported as $16.91 million for the quarter, up 125.3% from the year-ago period. PRPL’s adjusted net income came in at $11.97 million, representing a 158.6% year-over-year improvement. Its adjusted EPS increased 112.5% year-over-year to $0.17. As of March 31, 2021, the company had $103.82 million in cash and cash equivalents.

Past and Expected Financial Performance

TPX’s total assets and revenue have grown at CAGRs of 8.8% and 14.2%, respectively, over the past three years.

Analysts expect TPX’s revenue to increase 8.2% year-over-year in the current quarter (ending September 30, 2021), 23.5% in the current year, and 6.1% next year. Its EPS is expected to increase 11.3% year-over-year in the current quarter, 42.5% in the current year, and 12.5% next year. The stock’s EPS is expected to grow at a 27.9% rate per annum over the next five years.

In comparison, PRPL’s total assets and revenue increased at CAGRs of 92.7% and 46.3%, respectively, over the past three years.

Analysts expect PRPL’s revenue to increase 18.3% year-over-year in the current quarter (ending September 30, 2021), 27.3% in the current year, and 27.4% next year. Its EPS is expected to decline 11.6% year-over-year in the current quarter but increase marginally in the current year and 53% next year. Analysts expect the stock’s EPS to grow at a 43.1% rate per annum over the next five years.

Profitability

TPX’s trailing-12-month revenue is 5.5 times  PRPL’s. TPX is also more profitable, with a 17.9% EBITDA margin versus PRPL’s 12.4%.

Also, TPX’s net income margin and ROE values of 10.8% and 156.7%, respectively, compare favorably with PRPL’s negative values.

Valuation

In terms of non-GAAP forward P/E, PRPL is currently trading at 33.55x, which is 142.6% higher than TPX’s 13.83x. In addition, PRPL’s 2.19x non-GAAP forward PEG is 346.9% higher than TPX’s 0.49x.

Also, in terms of forward EV/EBITDA, PRPL’s 20.85x is 115.4% higher than TPX’s 9.68x.

POWR Ratings

While PRPL has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, TPX has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

In terms of Quality, TPX has been graded a B, which is consistent with its higher-than-industry profitability ratios. TPX’s 13.2% trailing-12-month levered free cash flow margin is 66.8% higher than the 7.9% industry average. In comparison, PRPL has a C grade for Quality, which is in sync with its slightly lower-than industry profit margin. The company has a 1.7% trailing-12-month levered free cash flow margin, which is 78.8% lower than the 7.9% industry average.

TPX has a C grade for Value, which is consistent with its slightly higher-than-industry valuation ratios. TPX’s 13.53x trailing-12-month EV/EBITDA value is 2.1% higher than the 13.24x industry average. However, PRPL’s D grade for Value reflects its overvaluation. The company has a 39.17x non-GAAP forward P/E, which is 128.5% higher than the 17.15 x industry average.

Of the 63 stocks in the A-rated Home Improvement & Goods industry, PRPL is ranked #58, while TPX is ranked #15.

Beyond what we’ve stated above, our POWR Ratings system has also rated both TPX and PRPL for Momentum, Growth, Stability, and Sentiment. Get all PRPL ratings here. Also, click here to see the additional POWR Ratings for TPX.

The Winner

The rising demand for comfortable mattresses positions both TPX and PRPL well to deliver solid returns this summer. However, its higher growth prospects and relatively lower valuation make TPX a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Home Improvement & Goods industry.

TPX shares were trading at $43.43 per share on Thursday afternoon, up $5.79 (+15.38%). Year-to-date, TPX has gained 61.48%, versus a 18.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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