A Few Standouts - Page 2 of 2

A Few Standouts

data as of 6/14/07 Source: Yahoo! Finance

How do your three picks stand out?
All three exhibit several–if not all–of the attributes I spelled out. First, there’s The Walt Disney Co. (DIS), which is composed of strong brands: ESPN, ABC, Disney, its world-famous theme parks, and Pixar. It’s reaping the benefit of titles such as Cars and Pirates of the Caribbean. Under the direction of CEO Robert Iger, Disney has been very aggressive at capitalizing on new media platforms.

What about Disney’s finances?
Disney is in top-notch financial shape. Management is disciplined and the company’s debt is low. Disney’s price-to-earnings ratio of around 17 to 18 is in line with the market and a stock buyback program should help push shares to our 12-month target of $45.

Why choose Group 1 Automotive Inc. in a sluggish auto market? What’s the catalyst?
Group 1 (GPI) owns car retailers–luxury and import dealers that happen to be positioned in a niche that is currently doing well. Demographics help, too: Baby boomers are spending more and more on high-end vehicles.
Group 1 has been on an aggressive acquisition spree and we expect it to keep that up at a pace of about $500 million a year. That helps to cut costs from consolidation. Shares are trading at around 10 times our 2007 earnings estimate, a 10% to 15% discount to the group, which currently trades at 11 or 12 times the coming year’s profits.

What do you like about Tempur-Pedic International Inc.?
Tempur-Pedic (TPX) has landed upon a niche market in a slow growth area. The outlook for home furnishings is slow, just like that of the housing and automobile markets. Additionally, the bedding and innerspring mattress industry is a very mature business with the likes of Sealy, Serta, and Simmons fighting it out. Tempur-Pedic, meanwhile, has found a niche in the production of elastic foam mattresses and pillows–a high-end segment of the market that has produced 33% compounded annual sales growth for the company over the last four years. That’s extraordinary. What’s more, low inflation and low unemployment help keep demand steady. A weak U.S. dollar helps because the company generates one-third of its sales overseas.

What about Tempur-Pedic’s valuation?
Tempur-Pedic trades at about 17 times our 2007 earnings estimate, while peers such as Ethan Allen and Leggett & Platt are in the 20 to 21 range. We think the stock is a good value in light of our average annual sales growth estimate in the low teens for the next few years.