Options Trade – Select Comfort Corporation (SCSS )
Tuesday, December 18, 2012

Select Comfort Corporation - Aggressive Growth Expected!

**OPTION TRADE: Buy the SCSS Mar 2013 25.000 call (SCSS130316C00025000) at or under $2.20, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.50.

by Ian Harvey

December 18, 2012

Introduction

At times when the market has traded higher there have been several big name stocks that lost great value. Some of which were deserving of this loss, but then there will be some that will trade higher and return large gains following this loss. With that being said, one of these stocks that suffered a large loss Select Comfort (NASDAQ: SCSS).

Select Comfort lost 10% of its valuation, and did not announce poor earnings, lower guidance, or announce anything discouraging. Instead, the stock was pushed lower due to lower guidance from Mattress Firm Holding Corp. This reaction reminds me a lot of when Tempur-Pedic cut its guidance in half back in Q2 of this year. Back then, Select Comfort traded lower but then recovered with large gains. Select Comfort continues to prove quarter-after-quarter that it’s a great company in a volatile and struggling industry. Therefore, buying at this present level would be advantageous. The stock might fluctuate a bit, but I feel fairly confident that it will see a similar effect as back in July, when it rose more than 60%.

With the stock at $25.06 — and SCSS being a volatile stock — there are fabulous premiums available. Plus, the company is not subject to the whims of investors like Netflix.

About Select Comfort

Founded in 1987 and headquartered in Minneapolis, Minnesota, Select Comfort Corporation develops, manufactures and sells adjustable beds and sleeping accessories in the United States, Canada and Australia. In the United States, it conducts business through approximately 394 stores (as of September 29, 2012). The company, which primarily competes with Sealy Corporation (ZZ), has a market cap of $1.56 billion.

Select Comfort Corporation (SCSS) has an impressive year-to-date return of 25.5%, a robust long-term earnings growth projection of 22.7% and a positive earnings surprise history. This bedding retailer posted outstanding third-quarter 2012 results recently, which included a raised guidance for the full year.

SCSS has now surpassed consensus estimates for 15 straight quarters, amassing an average surprise of 48.5% over that period. The company's consumer-oriented strategies, brand building initiatives and product innovation underscore the stock's momentum.

Earnings -- Profit Surges, Guidance Up

On October 17, Select Comfort posted third-quarter earnings of 46 cents per share, topping the Consensus Estimate by 12.2% and improving from last year by 48%.

Net sales of $246.8 million were marginally ahead of the Consensus Estimate at $246 million, but jumped 24% from $199.6 million in the year-ago period. Same-store sales were up 21% and 20 net new stores were opened in the past year. The company opened 13 net new outlets during the quarter and plans a total store count of 408 to 412 by the end of 2012.

Gross profit grew 27.8% to $160.7 million, whereas gross margin improved 210 basis points to 65.1%. Operating income surged 52% to $40.2 million, while operating margin expanded 300 basis points to 16.3%.

Buoyed by the strong performance, Select Comfort raised its full-year 2012 earnings outlook to between $1.51 and $1.53 per share. Earlier, the company had forecasted earnings between $1.41 and $1.47.

Select Comfort's long-term goal includes annual earnings per share growth of over 20%, sales generation of more than $1.5 billion and operating margin of more than 15% by 2015.

Rising Earnings Estimate Revisions

The Consensus Estimate for 2012 rose 4.8% to $1.53 per share in the past 30 days, as 10 of 11 estimates were revised higher. The current estimate implies year-over-year growth of 46.9%.

There has also been an improvement of 2.7% in just the past 7 days. The current estimate suggests year-over-year growth of 23.7%.

Valuation Picture

Select Comfort currently trades at a forward P/E of 18.20x, reflecting a 4.3% premium to the peer group average of 19.02x. Also, on a price-to-book basis, shares trade at 8.29x, a substantial premium to the peer group average of 1.17x. With respect to return on equity (ROE), the stock looks very attractive. It has a trailing 12-month ROE of 51%, against its peer group average of 3.6%. This implies that the company reinvests its earnings more efficiently than its peer group.

Chart Revelation

A quick glance at the price and consensus chart reveals that the stock price line remains below the 2012 and 2013 earnings estimate lines, reflecting that the stock is still undervalued. Currently, the stock price is up 25.5% year to date, significantly higher than the S&P 500's return of 10.3%.

Analysts’ Recommendation

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the SCSS Mar 2013 25.000 call (SCSS130316C00025000) at or under $2.20, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.50.



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