As the Federal Reserve continues to pursue its quantitative easing strategy, the US economy is persistently responding by projecting an improvement in confidence indicators. The Fed Chairman has not reflected upon a discontinuation of monetary expansion implying that the low interest rates will persist up until the macroeconomic targets are achieved. In this situation a number of industries, heavily reliant upon economic activity, appear to be recovering at a decent pace. The toy, doll and game manufacturing industry is heavily dependent on macroeconomic conditions as the performance is sensitive to indicators such as disposable income and consumer spending.
Source: Trading Economics
The above chart shows the US disposable personal income since the beginning of FY08. The disposable income over this reference period has substantially improved as economic activity has reflected decent growth over the period. Despite the decrease in unemployment rates, the targeted unemployment has not been reached which suggests that the toy manufacturing industry still has further space to grow.
Source: Trading Economics
The above chart shows the consumer spending statistic since the beginning of FY08. In the post-crisis situation, the consumer spending has shown a marked improvement reflecting the recovery in economic activity.
Mattel Inc. (MAT) is one of the major players in the industry with a market capitalization of $15.8 billion and annual revenues of $6.42 billion. The company has been unable to operate at its full potential in recent years due to the depression in Europe as a major proportion of the company's revenues, 54% of the total international sales can be traced back to the region. However, in the first quarter report of FY13, the company reported a 13% YoY increase in revenues from Europe reflecting a strong improvement in the performance from the region.
The chart above shows the stock performance of Mattel Inc. and its competitors, Hasbro Inc. (HAS) and Jakks Pacific Inc. (JAKK), over a period of one year. The chart shows that Jakks Pacific has substantially deteriorated over the reference period; however, Mattel has outperformed its competitors.
Growth and Performance
As shown in the above chart, investors have associated the stock with stronger growth prospects and expectations as compared to its competitors. This is because of the results produced by the company in recent years.
The above chart shows the net income growth of the company as compared to its competitor Hasbro Inc. since the beginning of FY08. The chart clearly reflects that the company has managed to produce net income growth of more than 50% whereas the competitor's growth has remained comparatively thin.
Data Source: Morningstar
The above chart shows the total assets of the company since FY08. The company has demonstrated a strong recovery over this period reflecting upon its future growth prospects. The total assets have shown a CAGR of 8.7% in this period. The company's strong levels of growth and performance have resulted in performance indicators which beat the industry averages by a strong margin. The company currently operates at a TTM operating margin of 16.3% and net margin of 12.4% as compared to industry averages of 13.4% and 9.1% respectively.
Financial Strength & Stability
The company has shown a strong performance with respect to growth but that is not the only upside associated with the stock. In fact, the more important factor is that the company has remained robust through difficult periods and shown a quick response to the deterioration in FY08.
Data Source: Morningstar
The above chart shows the breakdown of the company's return on equity into net margin, asset turnover and financial leverage. The company's profit margins showed a substantial recover in the three years following the recession. The company has been able to maintain its margins after that. The return on equity has shown a similar pattern. This also reflects upon the company's financial stability as the return on equity has occurred simultaneously with a manageable degree of financial risk. Furthermore, the company is currently operating a current ratio of 3.5 and quick ratio of 1.49 which suggests that the company has also maintained a strong liquidity position. Lastly, the company has also laid significant emphasis on investor consideration as it offers a dividend yield of 2.9% which is more than the industry average of 1.7% and the S&P 500 average of 2.3%.
The toy, dolls and game manufacturing industry has bright prospects entering into the second half of FY13 as the economic conditions are showing strong improvement. The equity indices across the globe present a fair reflection of the global economic growth. In this situation, Mattel is in a strong position to pursue profitable growth and prove to be lucrative opportunity for investors. Keeping these factors in view, a buy recommendation is proposed for long term investors. In an investment horizon of 3-5 years, the company will provide commendable returns to investors due to its growth prospects and calculated exposure to risk. The decent dividend yield will also attract long term investors towards the stock.