Shares of Sleep Number SNBR have soared 110% in the last six months to more than double the Home Furnishing-Appliance Market, as people upgrade their living spaces during the pandemic. More importantly, home buying is surging amid the record-low mortgage rates and a desire for more space during the coronavirus.
Sleep Number is set to release its Q3 FY20 results on Wednesday, October 14. So should investors consider buying the high-end bed firm’s stock as a longer-term bet on the housing market?
The Quick Pitch
U.S. home sales surged 10.5% on an annual basis in August, which came after July’s huge growth that represented the strongest monthly gain ever recorded, dating back to 1968. And now the housing market is finally being driven by millennials, which has industry analysts projecting a multi-year boom for the market, as the largest portion of the generation start to get married and have kids.
For instance, the Construction sector is one of only two of the 16 Zacks sectors that is projected to post earnings growth in the third quarter, with it expected to climb 11%—compared to the Medical sector’s 0.7% and the overall S&P 500’s projected -22.3% decline (also read: Q3 Bank Earnings in the Spotlight Next Week).
Sleep Number itself is not an exact proxy for the broader home market, but it does stand to benefit. The company, which makes high-end adjustable beds, memory foam mattresses, kids beds, bedding, pillows and more is a solid way to play the overall housing market expansion. On top of that, more people are paying attention to their health and self care during the coronavirus, and sleeping plays a vital role.
Sleep Number topped our estimates last quarter, even though its revenue slipped due to pandemic-related store closures. The company noted in its mid-July report that more than 95% of its retail stores were open, “compared with 53% open on average during the second quarter.”
Nonetheless, SNBR stock has outpaced its industry, as well as rival Tempur Sealy TPX and bed-in-a-box mattress firm Casper Sleep Inc. CSPR in 2020, up 27%. Investors can also see that Sleep Number stock has easily topped the S&P 500 over the last five years. SNBR closed regular trading Friday at $55.50 a share, which gives it roughly 8% more room to run before it hits its February highs.
Zacks estimates call for Sleep Number’s third-quarter revenue to jump 11.2% to reach $527.9 million. This would mark big improvement from Q2’s 20% sales decline for the period ended on ended June 27. Meanwhile, its adjusted earnings are projected to jump 7.5% to hit $1.01 a share.
The company’s growth is expected to continue in the fourth quarter. Peeking further down the road, its FY20 sales are projected to climb 4.2%, with FY21 set to come in 5.5% higher to reach $1.87 billion. And its overall adjusted earnings are expected to pop 3.7% and 17%, respectively over this stretch.
Sleep Number’s positive earnings revision trends help it land a Zacks Rank #2 (Buy) heading into its earnings release. The stock also sports “B” grades for Value, Growth, and Momentum in our Style Scores system and it is part of an industry that rests in the top 9% of our over 250 Zacks industries. And SNBR has crushed our bottom-line estimates by an average of 40% in the trailing four periods.
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