Somnigroup International ($SGI) is an Asymmetric Bet

Welcome back.

We think $SGI is a buy for three reasons;

• At the time of this posting, the Leggett and Platt deal has went through, which we projected as accretive with NO synergies (page 17)

• Industry normalizes, units produced in the bedding industry are at an all time low, even lower than 2008. We have completed multiple channel checks and our alternative data shows that this trough won’t last for long. (Catalyst 2 on pages 18 and 19)

• Structural tailwinds of health and wellness(page 8)

A lot of the arguments we got against this pitch were, “Isn’t bedding tied to housing?” and we responded that a majority of people buy beds for two reasons nowadays: health/comfort and deterioration. Combine this with the fact that we believe that bedding demand is a bubble waiting to burst, so the demand is non-discretionary in our eyes.

SGI is about to be a legal monopoly as their two main public comps, Purple and Sleep Number, are both struggling. Sleep Number just issued a going concern, and $PRPL stock is down 98% over the past 5 years. With the addition of $LEG, $SGI now owns its whole value chain, from making the bed parts, mattresses, and lastly retailing the beds out to customers.

Our base case price target we see as conservative due to the pricing in no synergies of the $LEG deal into our model.

Conservative Base case PT of $88, our margin growth in the model was driven by a higher DTC mix

Ideation

Our first idea for this competition was $AXON; this was around the time of the software selloff, but as the competition neared, we couldn’t justify the price anymore.

A couple of names that we also looked at was $TOST ( ▲ 1.16% ) , $NOW ( ▲ 0.33% ) , $SNOW ( ▲ 0.77% ) , and $SPOT ( ▲ 0.14% )  

We chose $SGI because of the floor that the stock had, industry units aren’t ever going to be this low again, and we don’t think analysts see that (except UBS).

The idea was found in Third Points’ quarterly letter, which I have attached down below.

Any questions, email the sleep specialists:

[email protected] (industry normalization, model, and valuation)

[email protected] (industry tailwinds, valuation dislocation, and comps)

[email protected] ($LEG M&A and Company moat)

Thanks for reading.