2020 Stocks: Will Sleep Country (TSX:ZZZ) Make a Bullish Run?

Sleep Country Canada Holdings Inc is slightly undervalued. Here is why you should add it to your TFSA or RRSP.

| More on:
question marks written reminders tickets

Image source: Getty Images

Sleep Country (TSX:ZZZ) operates in the retail marketplace under three brands, Sleep Country, Dormez-vous and Endy, offering mattresses and bedding products. The company has 275 stores as well as an online shop.

The company’s two subsidiaries include Sleep Country Canada Inc. (SCCI) and Endy. The company reports a market capitalization of $730 million with a 52-week high of $22.70 and a 52-week low of $16.01.

Intrinsic price

Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Sleep Country has an intrinsic value of $24.23 per share.

Assuming less than average industry growth, the intrinsic value would be $22.94 per share and higher than average industry growth would result in an intrinsic value of $25.68 per share.

At the current share price of $19.64 at writing, I believe Sleep Country is slightly undervalued. Investors looking to add a mattress retail company to their TFSA or RRSP should consider buying shares of Sleep Country.

I would recommend investors follow the stock through 2020, as there may be an opportunity to buy shares at a discount.

Sleep Country has an enterprise value of $1.1 billion, representing the theoretical price a buyer would pay for all of Sleep Country’ outstanding shares plus its debt. One of the good things about Sleep Country is its low leverage with debt at 18.9% of total capital versus equity at 81.1% of total capital.

Financial highlights

For the nine months ended September 30, 2019, the company reports a mediocre balance sheet with $45 million of negative retained earnings (up from $66 million negative retained earnings in 2018).

This is not ideal for shareholders, however, as it suggests the company has reported more years of cumulative net loss than net income. Despite this, the company has reduced its negative retained earnings by $21 million year over year.

Overall revenues for the period are up from $463 million in 2018 to $526 million in 2019 (+14%) for gross profits of $164 million (gross profit margin of 31%). Pretax income is $57 million (down from $63 million in 2018).

The company reports cash on hand of $48 million (up from $30 million in 2018). Given current lease liabilities of $32 million, the company has enough cash on hand to meet its short-term debt obligations.

The management team is committed to being fiscally responsible, as evidenced by its $19.5 million pay down of long-term debt in 2019 following a $38 million pay down in 2018. This is offset by draws of $26.7 million in 2019 and $35.8 million in 2018.

The company is a dividend paying entity with a current yield of 3.97%. It pays a quarterly dividend of $0.195.

Foolish takeaway

Investors looking to buy shares of a mattress retailer should add Sleep Country to their watch list. Despite the negative retained earnings, overall revenues increased year over year and the company is well positioned to benefit from the online mattress industry with its ownership of Endy.

Sleep Country ended the period with a cash balance of $48 million — plenty of room to cover short-term debt obligations and partially fund business growth.

Further, the company reports a current share price of $19.64, which means that it already trades at less than an intrinsic value of $24.23 per share.

Investors should follow the stock through 2020 as a recession could present an opportunity to buy shares at a cheaper price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

More on Investing

A bull outlined against a field
Tech Stocks

3 Undervalued Canadian Stocks Set for a Bull Run

Investing in cheap and undervalued TSX stocks such as Cargojet and Real Matters can help you beat the broader indices…

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, December 7

An early morning recovery in commodity prices could lift the main TSX index at the open today.

Read more »

Aircraft wing plane

Prediction: Air Canada Stock Will Sit on the Runway for a While

Will Air Canada stock be able to continue to ride post-pandemic tailwinds, or is this stock pricing in an upcoming…

Read more »

Businessman holding AI cloud
Tech Stocks

Artificial Intelligence, Real Returns: Profiting From the AI Revolution

Tech companies like Shopify Inc (TSX:SHOP) are profiting from the AI revolution.

Read more »

Paper airplanes flying on blue sky with form of growing graph

Are Airline Stocks a Good Buy in December 2023?

Airline stocks are cyclical. So, interested investors should aim to buy low and sell high to target price appreciation.

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Stocks for Beginners

TFSA Investors: 3 Steps to Get Into Cross-Border Investing

Overseas trading can be scary. But if you follow these steps, you can certainly achieve far higher returns than just…

Read more »

Dividend Stocks

2 Top Telecommunication Stocks to Buy on the TSX Today

Two telco stocks, but not the dominant industry players, are buying opportunities on the TSX today.

Read more »

Business man on stock market financial trade indicator background.

Better Buy: Canadian Bank Stocks or Fintech Stocks?

Bank stocks like Bank of Nova Scotia (TSX:BNS) are often cheaper than fintech stocks.

Read more »