Select Comfort Is Transforming the Way We Sleep

Select Comfort (SNBR -0.08%) utilizes technology to produce mattresses that are not just comfortable, they also monitor the quality of our sleep and improve our well-being.

The company's SleepIQ technology helps its users get insight into the quality of their sleep and their health. SleepIQ includes sensors that measure users' breathing, heart rates, and sleeping patterns. This technology complements Select Comfort's Sleep Number mattresses, which adjust to users' bodies to optimize their posture and spinal alignment. The Sleep Number beds also include other features that let sleepers optimize their comfort by adjusting the temperature and firmness of their mattresses .

Importantly, users can sync all of the information generated by Select Comfort's technology and its adjustment features with their phones, tablets, or televisions. This is important as people become increasingly mobile and more health-conscious -- they will want regular updates on their health. Moreover, doctors could also use the metrics generated by the Sleep Number beds and Sleep IQ technology to improve their patients' health.

While Select Comfort has made pioneering efforts to revolutionize the way we sleep, its valuation also affects its investment potential. So is Select Comfort's stock a solid investment, or would competitors Tempur Sealy International (TPX 0.03%) or Mattress Firm Holding Corp. (NASDAQ: MFRM) make better investments?

Not paying much for a good company

Data Source: Morningstar & Yahoo Finance

All of the companies trade at a premium to the S&P 500's current P/E ratio of 18, but on a relative basis Select Comfort is the clear bargain. Select Comfort trades at nearly half the valuation of Tempur Sealy and a significant discount to Mattress Firm as well on a P/E basis. Looking out twelve months, the valuations are more concentrated, but Select Comfort remains the bargain with a forward P/E of 16.5.

Select Comfort and Mattress Firm have the same five-year valuation on a PEG basis, followed by Tempur Sealy. None of the companies have excessively high valuations on this basis, but I believe that Select Comfort offers the best proposition for growth into its valuation with its highly technological approach to sleep and mattresses. Furthermore, Mattress Firm just sells mattresses at retail, while Select Comfort makes its own products, markets them, and sells them in its own stores; therefore, it has more control over its products and can shape them the way it wants.

A company can generate all of the earnings it wants, but if it does not generate cash flow then it will swiftly perish. Luckily, all of the companies are cash flow positive, but Select Comfort's cash flow carries the lowest valuation among the three companies with a P/CF multiple of 14. Mattress Firm is not far behind with a P/CF of 17, but Tempur Sealy seems quite overvalued on a cash flow basis with a P/CF of 40.

If you don't buy Select Comfort, someone else will
In addition to its fair valuation, Select Comfort carries no debt, which makes it attractive to potential acquirers such as rivals or private-equity firms. The company is poised for a technological future in which we monitor our health and the quality of our sleep through our cell phones, tablet computers, and other devices. Therefore, if individual investors do not notice the potential and valuation of Select Comfort, bigger investors might notice it and take away their chance to invest in a company that is prepared for the future.

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