Mattel Is Becoming A Better Story Teller

| About: Mattel, Inc. (MAT)

As the largest toy maker, Mattel (NASDAQ:MAT) is now poised to learn how to tell good stories out of their fantastic brands. Mattel had a disappointing Q2 2013 earnings report, and caused a selloff in July. Just one quarter after, Mattel refilled investor's confidence by beating the estimated EPS by $0.09 per share.

When Barbie's sales declined in Q2 2013, many investors were anxious about Mattel's future. Barbie is the largest doll brand in the world, and it has been doing well for over 50-years. Such a brand isn't likely to fade in a short time.

However, Mattel did notice a problem - their old brands aren't story-based. Why is it so important for brands to tell stories? Brands with stories have far better scalability. With good stories, toy makers can even develop many more compelling characters that eventually lead to high popularity. Mattel's Monster High doll brand has been winning market share everywhere in the world, and the key behind the success is the story.

When Monster High was lunched in 2010, it was deploying its brand name almost on every channel. Monster high had web series, books, MTVs, mobile games, DVD movies and social medias ready to collaborate. All the main characters are sexy, punky and mysterious female teenagers. Since 2010, Monster High has been growing exceptionally well. Some investors still worry about cannibalism between Monster High and Barbie. I will get to it later.

Not long after the success of Monster High, a new spin-off series called Ever After High was born in 2013. Ever After High is based on the children of Fairytale characters. The main characters are daughters of famous fairytale characters like Snow White, Little Red Riding Hood, Evil Queen, Mad Hatter, and Sleeping Beauty. Mattel has learned its lesson, right? This is a very smart move. Building stories based on existing traditional children stories is very cost-efficient. Both parents and teenage girls are familiar with the classic characters, and hence, they could have a higher tendency to purchase Ever After High. Since Monster High already proved its value, Ever After High seems like a steady move to subdivide the doll market.

Investors were talking about cannibalism after Q2 2013 earnings report. Mattel did admit that new doll brands had take over some of Barbie's market share. Nevertheless, the decline in Barbie wasn't fatal. Barbie may find its market growth in other nationals that don't tend to love rebellious characters like Monster High.

China, Russia, Mexico and Brazil are the top 4 emerging nations. These nations have over one third of the global population but only contribute about 10% of the total toy industry sales. China, the second largest economy in the world recently loosened its one-child policy, which gives toy maker industry a positive signal. Some of you may know that Mattel closed its flagship Barbie store in Shanghai two years ago. Mattel didn't understand the Chinese market. The way they deployed products was exactly the same how Hollywood treats the Chinese movie market now. Now they have learned their lesson, Barbie could have reinvented itself in China by adapting the Chinese "feminism". In addition, it's important that Mattel keeps Barbie's exposure up by putting it into blockbusters like Toy Story series.

Back home, Mattel is working hard to launch a few more new brands ahead into 2014. I am not worried about the pipeline diversity; American Girl is opening stores to Canada. As for Mattel's weak spot - digital toy market, Mattel has worked with the popular multiple online game Minecraft. I believe Mattel has a strong pipeline that is well positioned to aim for the population under 18 years old and beyond.

One thing I like Mattel over Hasbro (NASDAQ:HAS) is that Mattel controls its expenditure much better. Mattel cuts its cost of goods using environment friendly packages. In fact, Mattel's RoE and RoA both beat Hasbro.

Overall, HAS is more of a "boy" toy company. Mattel on the other hand, focus on infants and girl products. Why I favor girls more? Well, parents love to spend more money on girls than boys.

Mattel is fairly priced right now to me. Projected 2013 and 2014 EPS is $2.75 per share and $3.00 per share respectively. Revenue growth for next year is expected to be around 4%-5%.

Let's do a simple evaluation on Mattel.

2014 projected EPS $3.00 X 16 (Hasbro's P/E ratio) = $48

As we can see, Mattel is fairly priced using next year's projection.

I personally would evaluate Mattel differently than the method I used above.

Since I have faith in Mattel's business model and brand management, I expect Mattel to grow at a very steady pace through existing market and emerging market penetration.

Say 5% increase in revenue for 3 years. 3 years later, it will be around 7.8 billion - 8 billion dollars. Mattel's EPS by then will increase more than 5% per year through better efficiency and repurchase. Say, every year, Mattel used 10% of its net profit to repurchase. (Assuming rest of the money stays in the bank) That's about 80 million -85 million dollars per year. 3 years, that's 240-250 million dollars or 1.6-2% of its total shares outstanding.

So, if efficiency stays the same, EPS 3 years later will be $3.00 (next year's projection) X 1.05^3 /0.98 (total shares outstanding reduced by 2%) = $3.54 per share

$3.54 X 16 (same P/E) = $56.64

In the short-term, Mattel's share price shouldn't exceed this level.

But because we know the company is expanding new markets and rolling out new products, this result might not be the case. Plus, Mattel pays about 3.5%-4% dividend every year.

Don't forget, Mattel's 2009 EPS was $1.61 per share with total revenue 5.4 billion dollars. Last year, Mattel's EPS boosted to $2.55 per share with total revenue 6.4 billion dollars.

EPS runs faster when the company sails on the right channel.

I think Mattel is going to adapt well ahead in the future and show robust growth.

Disclosure: I am long MAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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