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Household Goods Stocks

Sleep Number Corp Valuation – July 2018 $SNBR

Company Profile (excerpt from Reuters): Sleep Number Corporation, formerly Select Comfort Corporation, incorporated on February 27, 1987, is a designer, manufacturer, marketer, retailer and servicer of a line of Sleep Number beds. The Company offers consumers individualized sleep solutions and services, which include a complete line of Sleep Number beds, bases and bedding accessories. Its Sleep Number bed offers SleepIQ technology sensors that work directly with the bed’s DualAir technology to track each individual’s sleep. The Sleep Number bedding collection comprises a line of sleep products that are designed to solve sleep issues. It offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products. It offers Sleep Number beds in ranges within the mattress category, and in a range of sizes, including twin, full, queen, eastern king and California king. It also offers an assortment of temperature-balancing products.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of SNBR – July 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,095,079,747 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.41 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 82.99% Pass
6. Moderate PEmg Ratio PEmg < 20 20.47 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 32.06 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.41 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.43
MG Growth Estimate 3.54%
MG Value $22.31
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $20.77
MG Value based on 0% Growth $12.18
Market Implied Growth Rate 5.99%
Current Price $29.33
% of Intrinsic Value 131.46%

Sleep Number Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.16 in 2014 to an estimated $1.43 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.99% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Sleep Number Corp revealed the company was trading above its Graham Number of $9.54. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 20.47, which was above the industry average of 19.42. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-7.12.

Sleep Number Corp scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$7.12
Graham Number $9.54
PEmg 20.47
Current Ratio 0.41
PB Ratio 32.06
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $142,381,000
Total Current Liabilities $345,668,000
Long-Term Debt $0
Total Assets $458,701,000
Intangible Assets $77,042,000
Total Liabilities $422,704,000
Shares Outstanding (Diluted Average) 39,347,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.76
Dec2017 $1.55
Dec2016 $1.10
Dec2015 $0.97
Dec2014 $1.25
Dec2013 $1.08
Dec2012 $1.37
Dec2011 $1.07
Dec2010 $0.57
Dec2009 $0.77
Dec2008 -$1.59
Dec2007 $0.57
Dec2006 $0.85
Dec2005 $0.76
Dec2004 $0.53
Dec2003 $0.46
Dec2002 $0.73
Dec2001 -$0.44
Dec2000 -$1.39
Dec1999 -$0.30
Dec1998 $0.13

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.43
Dec2017 $1.24
Dec2016 $1.11
Dec2015 $1.13
Dec2014 $1.16
Dec2013 $1.07
Dec2012 $0.85
Dec2011 $0.49
Dec2010 $0.21
Dec2009 $0.11
Dec2008 -$0.07
Dec2007 $0.67
Dec2006 $0.70
Dec2005 $0.55
Dec2004 $0.29
Dec2003 $0.05
Dec2002 -$0.19

Recommended Reading:

Other ModernGraham posts about the company

Select Comfort Corp Valuation – Initial Coverage $SCSS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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