Sleep Number Stock: A Steal At This Price?

One important outcome of the coronavirus pandemic has been the increased willingness of customers to spend extra cash on products that improve their home and domestic living conditions.

While digital entertainment companies and subscription media providers have been big winners here, so too have furniture and interior décor enterprises, especially those that cater to the creature comforts in people’s lives. It’s not surprising then that the bed manufacturer Sleep Number has had a profitable lock-down, as customers flocked in droves to buy its high-end and technologically sophisticated mattresses and sleep solution products.

However, what began as a dream price run for Sleep Number (SNBR) later turned into a nightmare it couldn’t shake off, as the company rapidly started to lose value over the course of 2021.

We examine the company’s business, and figure out if Sleep Number can return any of that lost capital to investors in 2022.

Is Sleep Number Stock Cheap Right Now?

The first twelve months of the Covid-19 crisis were good for Sleep Number’s share price, with the Minneapolis-based bed manufacturer seeing its stock value rise more than 800% from lows of $16 in March 2020, to highs of over $146 just one year later. But since its Zenith in early 2021, SNBR has been falling pretty much continuously, losing 47% of its peak worth to trade at around $77 today.

It’s not that difficult to see why Sleep Number’s stock tanked so dramatically the last nine months, as investors decided to take profit from their investment given the company’s stratospheric rise in such a small space of time.

But cashing out at the present time might be wrong decision; sure, there’s still a high fraction of short interest in the company at 17% – and it isn’t clear whether SNBR has gone as low as it’s going to go yet – but considering the stock’s strong fundamental evaluation, there’s still a lot going for Sleep Number that could see a turnaround at any time.

For instance, before the outbreak of Covid-19, Sleep Number had a very good record of improving its return on invested capital (ROIC). In fact, SNBR grew this metric every year between 2015 and 2020, going from an ROIC of 11.2% at the beginning of the period, to an ROIC of 25% at the end.

Indeed, during its latest third quarter segment, the firm announced an ROIC of 34%, up from 21% for the prior-year comparable timeframe.

The company has thee main ways of reinvesting cash into its operations: share buyback schemes, investment in new products, and growing its retail outlet footprint.

In its Q3 report of 2021, Sleep Number recorded that it had repurchased $364 million of its own stock in the nine months prior, accounting for what is at its current worth about a whooping 20% of its entire market capitalization.

There’s no doubt that the pandemic provided strong tailwinds for Sleep Number, but, as you can see, the company was doing pretty well before that. So, if those trends do abate somewhat, there’s little to worry about SNBR finding its feet again fairly soon.

Furthermore, the stock really is cheap right now. The company sports a huge gross profit margin of 61%, and is valued at just 0.76 of its forward price-to-sales fraction. If that’s not convincing enough, its P/E ratio is in the single-digit range, with a sector beating 9.9 multiple.

Sleep Number: Trading at 8x Free Cash Flow

There aren’t many businesses that can consistently generate free cash flow like SNBR does – that’s a massive plus point in the company’s favor; so much so, in fact, that it almost becomes a sort of financial moat vis-à-vis its industry rivals.

Indeed, Sleep Number has had positive cash flows every year since 2008, with its projected price-to-free cash flow multiple for the fourth quarter 2021 sitting at a very healthy 8.1. This is actually down from the last period, which was even higher at 9.8!

A positive effect of SNBR’s excellent cash flow position is that it provides the company with the funds and security to really focus on, and finance, its R&D activities.

As mentioned earlier, Sleep Number never rests when it comes to developing new products; its smart beds don’t just promote better and healthier sleep, they can also track and monitor user’s circadian rhythm, heartbeat, and body temperature to provide the best conditions for a perfect night’s sleep.

In this effort to continually improve its offerings, SNBR teams up with academic institutions and medical organizations – such as the Mayo Clinic – to further garner insights from its research work. And because of its abundant cash reserves, Sleep Number has been able to increase its R&D spend from $28 million in 2018 to around $50 million today.

Will Sleep Number Stock Fall?

It’s fairly disconcerting that Sleep Number has declined in value during 2021 the way it has, because, essentially, its business and financial performance have been pretty solid.

For example, SNBR’s latest Q3 2021 earnings card saw the company report a record total of $640 million in net sales, up 21% from last year, and 35% from 2019. Its operating income also broke records at $73 million, and its year-to-date EPS of $5.63 was up an astonishing 106% from 2020, and up again 199% against this metric in 2019.

Sleep Number’s gross profit of $390 million was up 17% year-on-year, and, as mentioned earlier, that represented a margin of 61% on its net sales.

Whether SNBR will continue to drop – or whether it can recover from a bad nine months – remains to be seen. But the company has good momentum at the moment, and, with record sales and operating income at its back, it would be a brave investor to bet too heavily against it at the present time.

However, Sleep Number does have a few serious competitors in the space, including Casper Sleep and Tempur Sealy. That said, SNBR’s specialty and level of technical expertise in the smart bed sector separates it from these more quotidian operations.

Is Sleep Number Stock A Buy?

The ultimate question for investors is whether or not there’s any realistic likelihood of serious capital appreciation in its share price over the medium- to long-term.

Just taking Sleep’s recent financial results should embolden traders. There was almost nothing to suggest any potential red flags for the business in the coming months; indeed, the scene was one of improving margins and excellent growth.

What should be especially pleasing to analysts is the company’s retail expansion efforts. The firm took its total store count from 602 at the beginning of 2021, and expects to close the year with around 650. Furthermore, the number of these stores that the company classes as “highly productive” has gone up 90% over the last two years.

For now though, it might be prudent to wait and see if the bottom is in for this well-managed firm. But, if it is, then the sell signal is most certainly flashing.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.