Smart Money is Bullish on Mattress Firm (MFRM) Despite a Downward Trend

Shares of Mattress Firm Holding Corp. (MFRM) have tumbled more than 20% on Friday's session after weaker-than-expected fiscal Q2 results combined with a weak sales outlook.

The company reported earnings per share of $0.67, which were lower than estimates by $0.05. Further, revenue of $661.1 million was also lower than analyst’s estimates of $663.58 million.

For the FY2016 the firm expects sales growth will be in the low single-digit range and guided lower for the remainder of the year. EPS are expected in the range of $2.30 to $2.45, down from previous expectations of $2.50 to $2.70.

"In the second quarter we delivered significant growth in both new and same-store sales, as we continue to integrate the acquisitions we made last year.

Mattress Firm produced robust second quarter net sales growth of approximately 61%. Strong growth and adjusted EBITDA of approximately 37% and approximately 10% growth in adjusted earnings per share. This quarter marked the eighth consecutive quarter of positive same-store sales performance," said CEO R. Stephen Stagner.

The company is selling at a reasonable valuation. The P/E ratio is at 38.66x, which is expensive when compared to the S&P. Further, the P/B Ratio is at 4.66x that is close to 1-year low of 4.43x and the P/S Ratio at 1.02x) is close to 1-year low of 0.97x.

The Houston-based chain of bedding stores is well-positioned to achieve growth despite a demand that is hurt by commodity volatility. According to Yahoo! (YHOO) Finance, the estimated one-year target share price is $70.56, so if you buy shares at current market price ($46.24), investor's return from price appreciation would be 52.6%, which is an attractive stock return.

The stock plummeted 21.78% in a year-to-date basis and 27.9% in the past 12 months. Despite a weak performance, hedge fund sentiment seems to be bullish in the stock in the last quarter. Gurus like John Burbank, Alan Fournier, Mariko Gordon and Ron Baron have added the stock in the second quarter of 2015.

On the other hand, David S. Winter and David J. Millstone's 40 North Management are the major shareholder, with a stake containing 2.58 million shares of the stock, valued at $157.7 million at the end of June. Although this huge position, the Fund has recently disclosed in an amended 13D filing, a reduction in its stake in the company by 166,011 shares to 2.42 million shares.

Published on Sep 15, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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