4 Stocks That Are Real Sleepers in 2012

Tickers in this article: MFRM SCSS TPX ZZ

BOSTON (TheStreet) -- Call it mattress madness, but the stocks of companies in the sleep-products industry, comprised of manufacturers and specialty retailers of mattresses, are among the biggest gainers this year.

The four companies in this niche have share-price gains ranging from 28% to 92% this year, versus the S&P 500's 9.6%.

The chief contributors to investors' positive views are that sales will grow as consumer confidence rebounds; that people buying new homes, or just moving, will buy new mattresses for their new residence; and, in a new wrinkle, new types of mattresses that promise an enhanced quality of sleep over that from old-fashioned, box-spring mattress, are gaining in popularity.

There has been particularly strong sales growth over the past quarter, according to industry trade group International Sleep Products Association, which reported that year-over-year unit sales rose 17.5% in February, 16.6% in January and 6.9% in December, after a relatively sleepy 2011 performance.

The new-home/new-mattress link is such a big sales driver for the industry that Goldman Sachs classifies mattress-makers as part of the building products industry.

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Housing starts and building permits for March are due today.

As for the appeal of new types of mattresses in lieu of box-spring ones, a new-found view on the importance of sleep in aiding health is building, especially among well-heeled baby boomers. As a result, more people are springing for $8,000-plus all-inclusive "sleep systems" as they promise a more comfortable night's sleep.

Tempur-Pedic International , for example, which has some of the highest-priced sleep systems, reported its sales increased 28% to $1.4 billion in 2011.

Industry representatives say mattresses should be considered "investments" since an individual sleeps fully a third of his life and a quality mattress should last eight to 10 years.

Mattresses with a new approach to catching quality Zs don't rely on springs for support, and they have proved especially attractive to buyers. They include Tempur-Pedic's viscoelastic memory foam mattress and Select Comforts' air-chamber mattresses. The latter come with remote controls allowing bed mates to dial in the firmness they want on their own side.

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Goldman Sachs said in a March 30 research note that mattress sales are "healthy (with) year-over-year gains in both units and average selling price. The increase in selling price is being driven by unit-share gains for the non-inner-spring category. Pricing is likely to remain healthy as non-inner-spring unit share expands, helped by new product introductions."

Serta, the second-largest mattress-maker, and Simmons, another big player, are privately held.

Here are four stocks of mattress makers in inverse order of their share-price gains this year:

4. Sealy

Company profile: Sealy, with a market value of $243 million, is the world's largest mattress manufacturer. Its products are sold under the Sealy, Sealy Posturepedic, Stearns & Foster, Bassett, TrueForm, SpringFree and RightTouch brand names through 2,900 retailers.

Investor takeaway: Its shares are up 28% this year but have a three-year, average annual decline of 7.6%. Analysts give its shares seven "hold" ratings, according to a survey of analysts by S&P. Sales rose 1% in 2011, over the prior year, including a fourth-quarter decline of 9.2%. S&P has its shares rated "hold," and said that the company "is losing market share due to a shift toward foam-based beds and away from inner-spring mattresses."

3. Select Comfort

Company profile: Select Comfort, with a market value of $2 billion, manufactures and retails air beds and other sleep-related products such as foundations, frames and pillows. It sells mattresses priced from $699 to $4,400 online and through its chain of 380 Sleep Number stores.

Investor takeaway: Its shares are up 57% this year and have a three-year, average annual return of 248%, and are now trading at $34.40, just under its 52-week high. Analysts give its shares four "buy" ratings, two "buy/holds," and two "holds," according to a survey of analysts by S&P.

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On Friday, Wedbush Securities reiterated its "outperform" rating on its shares in a research note, but raised its price target from $36 to $39. Its analysts wrote: "Given the backdrop of continued secular growth trends in the specialty mattress industry, Select Comfort is the clear market leader of air chamber mattress technology. We believe the company has significant market share gain opportunity as it continues to raise brand awareness through a successful marketing program emphasizing personalized comfort and unique product as well as a return to new square footage growth with successful off-mall stores. These initiatives are driving increased store productivity and driving cash flow with its attractive model."

Select Comfort is expected to report first-quarter results Thursday. Analysts expect earnings of 84 cents per share, up nearly 24% over last year, and revenue of $233 million, a 21% gain.

2. Tempur-Pedic International

Company profile: Tempur-Pedic, with a market value of $6 billion, makes premium viscoelastic foam (rather than spring) mattresses, pillows and other sleep-system products that can sell for over $8,000. In an effort to capture both ends of the mattress market, the company recently introduced a lower-priced product line called "Simplicity," and it estimates the market for beds costing between $1,000 and $2,000 is equal to that for beds costing above $2,000.

Investor takeaway: Its shares are up 64% this year and have a three-year, average annual return of 113%. Analysts give its shares seven "buy" ratings, three "buy/holds," and four "holds," according to a survey of analysts by S&P.

Goldman Sachs has a "neutral" rating on its shares and a $90 price target, which is a 5% premium to the current price, while S&P has it rated "buy," also with the same $90 target price. The company is scheduled to report earnings Thursday, and analysts expect 84 cents per share, up nearly 24% from a year earlier, while sales are estimated to rise 18% to $384 million.

1. Mattress Firm Holding

Company profile: Mattress Firm Holding, with a market value of $1.5 billion, is a specialty retailer of mattresses and related products and accessories in the U.S. It operated 729 stores at the end of January. The company acquired a competitor, the Mattress Giant chain, for $47 million two weeks ago. Mattress Firm's CEO told CNBC recently that his company is taking market share in a "fragmented industry" and wants to expand from its current 1,000 stores to 2,500, both organically and through acquisitions.

Investor takeaway: Its shares are up 92% this year to $45.45. The company's initial public offering was in November 2011 and, since then, its shares are up 135%. Last week, Mattress Firm said earnings in the three months through January was $17 million, or 56 cents per share. The company said it expects sales of $1.03 billion to $1.06 billion in the current fiscal year, well above analysts' average estimate of $880 million. It expects to earn $1.40 per share to $1.48 per share, while analysts expect $1.36 per share.

Last week, Barclay's Capital increased its target price on the stock to $59 from $40 after the fourth-quarter results, saying it remains impressed by the company's execution of its growth strategy as indicated by its 24.8% same-store growth in the fourth quarter, which indicates it's well-positioned for market-share gains.

>>To see these stocks in action, visit the 4 Stocks That Are Real Sleepers in 2012 portfolio on Stockpickr.

Tickers in this article: MFRM SCSS TPX ZZ