Seeking Alpha
Long only, value, long-term horizon, dividend growth investing
Profile| Send Message| ()  

At the age of five my son loves Disney Pixar's Cars (DIS). Every time we go to the store we have to stop by the toy section and look for the one car he wants, Rip Clutchgoneski. Since earlier this year the shelves have been all but empty with the re-launch of Mattel's (MAT) Cars toy line. Mattel has partnered with Disney since at least 1987 when Mattel received the rights to manufacture preschool toys for Disney.

Mattel has revenue of $6.5 billion for the last twelve months. As of the first quarter Mattel's assets are $6,193,671,000 and the company has liabilities of $3,145,483,000. Mattel is very conservatively financed. Mattel has $1,259,512,000 in cash and cash equivalents.

Mattel has paid dividends since 1983. Currently the dividend is at $1.44 or a 3.2% yield. Mattel's current payout is at 56%. In 2011 Mattel ended a decade-long practice of paying annual dividends for the more favorable quarterly dividend.

Mattel's current earnings are $2.30 a share. Mattel's Graham Number is at $21.38, considerably lower than its current price. Below are the earnings for the past seven years.

Year

2012

2011

2010

2009

2008

2007

2006

AVG

@ $45.00

EPS

$2.22

$2.18

$1.86

$1.45

$1.04

$1.53

$1.53

$1.69

P/E 26.63

We see a significant reduction in earnings in 2008; this is expected due to the very discretionary nature of the toy business. From 2008, we see an increase of earnings and Mattel getting back on track after only two years. This exhibits strength in the company as it was able to recover its earnings after only two years when other companies are still struggling five years later.

The Future!

I do not like to predict what may or may not happen with a company but the company's relationship with Disney may be key to growth. As mentioned earlier Mattel's partnership with Disney goes back to the mid-1980s. In 2009 Disney bought Marvel Comics for $4 billion and acquired properties such as X-Men and The Avengers. Last year Disney bought Star Wars for $4 billion. Both of these currently have contracts with Hasbro (HAS) to merchandise toys. Marvel has a contract until 2017 and Star Wars until 2020.

The question is what is going to happen next? Mattel has Disney's Princess line and manufactures toys from Pixar. Once the contracts with Marvel and Star Wars expire with Hasbro, Mattel is in a great position to jump in and take the contracts. Hasbro has acknowledged this possibility in the company's 2012 annual report.

Loss of a significant licensed property could harm our business.

In addition to developing and marketing products based on properties we own or control, we also seek to obtain licenses enabling us to develop and market products based on popular entertainment properties owned by third parties.

We currently have in-licenses to several successful entertainment properties, including MARVEL, STAR WARS, BEYBLADE and SESAME STREET. These licenses typically have multi-year terms and provide us with the right to market and sell designated classes of products. In recent years our sales of products under the MARVEL, STAR WARS, BEYBLADE and SESAME STREET licenses have been highly significant to our business. If any of these licenses were to terminate and not be renewed, or the popularity of any of these licensed properties was to significantly decline, our business would be damaged and we would need to successfully develop and market other products to replace the products previously offered under license.

Our license to the MARVEL property is granted from Marvel Entertainment, LLC and Marvel Characters B.V. (together "Marvel"). Our license to the STAR WARS property is granted by Lucas Licensing Ltd. and Lucasfilm Ltd. (together "Lucas"). Both Marvel and Lucas are owned by The Walt Disney Company.

Conclusion

So many factors are taken into consideration when looking at a company. First, I want to look at past performance and see where current pricing sits. For me Mattel is overpriced; most likely due to its incredible dividend. If you are interested in Mattel I'd definitely wait for a pullback and we might just be on the verge of one.

Disney's acquisitions of Marvel and Star Wars have put Mattel into a rather interesting place. Disney has favored Mattel as its toy manufacture. Once Marvel's and Star War's contracts are up with Hasbro, we may see significant growth if Mattel is able to close these deals. However, in the case of Star Wars, the brand has conducted business with Kenner since 1977, owned by General Mills (GIS) at the time.

A huge part of Mattel's potential growth is based on what company Disney decides to contract with after the next four years. If we see Marvel switch to Mattel then Star Wars should not be far behind.

Source: Mattel's Future May Be Magical