Google “How important is sleep?” and you get three billion results. So, it stands to reason that the booming sleep industry isn’t a fad. If that’s the case, investing in some of the sleep stocks that benefit from this huge trend would seem to be a wise investing strategy.
Fortune recently reported that “sleep tourism” is booming. According to HTF Market Intelligence, this market is expected to grow 8% annually between 2023 and 2028 — to $1.05 trillion from $641 billion.
Based on these statistics, I will come up with three sleep stocks that should do well from this ongoing growth over the next five years.
Who are the big sleep stocks? Bed manufacturers come to mind. So do sleep aids and medicines and many other industries and businesses.
Here are three sleep stocks to buy to ride this massive trend. All three names have market capitalizations of $1 billion or higher.
ResMed (RMD)
This past year could have been better for ResMed (NYSE:RMD), the San Diego-based medical equipment company whose products treat sleep apnea, COPD (chronic obstructive pulmonary disease), and other respiratory issues.
The company has become far more software and technology-driven in recent years. As a result, it has two operating segments: Sleep and Respiratory Care (88% of revenue) and Software as a Service (SaaS) (12%).
In the past three fiscal years (June year-end), the company grew its sleep and respiratory care revenue by 32%, from $2.82 billion in 2021 to $3.73 billion in 2023. Its SaaS business had $498.0 million in revenue in 2023, up 33% from $373.6 million in 2021.
Its biggest growth driver has been its revenue from the U.S., Canada and Latin America, which has grown by 45% over the past three years to $2.48 billion. The U.S. accounts for 64% of ResMed’s overall revenue.
Thanks to its November 2022 acquisition of Medifox Dan for approximately $1 billion, the maker of out-of-hospital software helped grow its SaaS revenue in Q1 2024 by 32% to $139.3 million.
Its current price-to-sales ratio is 5.82, considerably less than its five-year average of 8.62, suggesting now is an excellent time to buy its stock.
Tempur Sealy International (TPX)
Tempur Sealy International (NYSE:TPX) is trading within 81 cents of an all-time high of $51.81. A $1,000 investment in TPX five years ago is worth $2,810, a compound annual growth rate of 23%. That’s not too shabby.
Tempur Sealy is the combination of Tempur-Pedic International with Sealy in March 2013. Including the assumption of debt, Tempur-Pedic paid approximately $1.3 billion.
In its final year as a public company in 2012, Sealy had revenue of $1.35 billion and $100.6 million in operating income. Tempur-Pedic’s 2012 revenue and operating income were $1.40 billion and $248.3 million, respectively. In 2022, its revenue was $4.91 billion, with $680.6 million in operating income, so its operating income has doubled over the past decade.
The company is acquiring Mattress Firm for $4 billion in cash ($2.7 billion) and stock ($1.3 billion). Mattress Firm is America’s largest mattress specialty retailer, with over 2,300 locations.
More importantly, Temper Sealy has become a fully integrated mattress company, bringing in-house a firm that it has worked with for over 35 years.
By making this acquisition, it’s betting that the customer will benefit from the integration of Mattress Firm while improving its bottom line. It looks like a winner.
Takeda Pharmaceutical (TAK)
Takeda Pharmaceutical (NYSE:TAK) stock has woefully underperformed the S&P 500 over the past five years — it’s down 28% vs. an 82% gain for the index — but the Japanese pharmaceutical company’s Neuroscience segment manufactures and sells Rozerem. This drug is used to treat insomnia.
The neuroscience segment accounted for 16% of its revenue in the first half of 2023, growing 3.2% over the first half of 2022. Overall, the company generated 2,101.7 billion Japanese yen ($14.2 billion) in the first half of 2023, 1.4% higher than a year earlier, excluding currency.
Unfortunately, when the company reported its first-half 2023 results in October, it also reported lower net income due to the non-cash impairment of intangible assets. In addition, it revised its full-year 2023 guidance for reported operating profits lower. Its share price fell on the news. It’s yet to recover from its September highs.
However, it raised its revenue for the year while maintaining its previous guidance for core operating profit. It now expects to generate an operating profit of 1,015 billion Japanese yen ($6.9 billion) in 2023, on 3,980 billion Japanese yen ($26.9 billion) in revenue.
While its drugs dedicated to sleep disorders are small, they play an important part in helping people get better rest at night.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
