Hold Your Nose And Buy Mattel

Aug.12.14 | About: Mattel, Inc. (MAT)

Summary

Mattel is a cheap stock and its operating challenges appear priced in to its valuation.

Mattel offers a very solid 4.3% dividend yield and dividend growth as well.

If Mattel can make progress on its inventory overhang, multiple expansion is not out of the question.

By now, it's no secret that toy manufacturer Mattel (NASDAQ:MAT) is struggling. In the digital age in which people are increasingly getting entertainment from their mobile devices, Mattel's toys and games are often viewed as a relic of the past.

Mattel's stock performance bears this out over the past several months. At $35 per share, Mattel is down about 25% just since the beginning of the year. To be sure, some of this is well-deserved. Mattel is posting poor numbers over the first half of the year, stemming from a disappointing holiday season last year and an ensuing inventory overhang.

It's also true that close rival Hasbro (NASDAQ:HAS) is performing much better than Mattel right now. Its stock is more aggressively valued, and rightly so. Hasbro has held up much better than Mattel recently. But investors are getting a relative bargain for Mattel. With a discounted share price and compelling dividend, investors looking for a value and income opportunity may want to hold their noses and buy Mattel at its current price.

Buy low

Mattel and Hasbro look like two companies going in opposite directions. Mattel's worldwide net sales fell 9% last quarter, due mostly to its flagship Barbie brand, which posted a 15% revenue decline. By comparison, Hasbro grew revenue by 8% last second quarter. This represented a strong acceleration from the previous quarter's 2% sales growth.

Most of Mattel's problems this year relate to a poor fourth quarter last year. The fourth quarter is crucial for toymakers like Mattel and Hasbro, since that period encapsulates the all-important holiday shopping season in the United States. Unfortunately, Mattel completely whiffed in the fourth quarter last year, as sales fell 6%.

That had a ripple effect that is causing problems this year. Mattel built up significant inventories in anticipation of a strong fourth quarter last year. When that didn't occur as management had planned, the company was stuck with a lot of inventory that it's still trying to work through. But importantly, Mattel is making progress on its inventory problem. The company's U.S. retail inventory fell by the mid-single digits last quarter. And, Mattel-owned inventories dropped by $100 million in the first half of the year, as compared to the end of last year.

Problems appear priced in

At current prices, Mattel is valued for just 14 times trailing earnings per share and 13 times forward EPS. This is a measurable discount to the overall market, and a significant discount to Hasbro as well. Hasbro trades for 20 times trailing earnings.

In addition, Mattel offers a very nice 4.3% dividend yield, compared to Hasbro's 3.4% yield. Mattel is committed to providing investors with a solid dividend. It raised its dividend by 5% earlier this year. Over the past five years, Mattel has increased its dividend by 15% compounded annually.

Mattel is making progress in its core structural problem. Sales are disappointing, but I don't see cause for alarm. Toys and games may not be as popular as they used to be, but it seems irrational to think they will disappear entirely.

In the meantime, new investors are treated to a cheap stock with a compelling dividend yield and a track record of solid dividend growth. Even if Mattel doesn't produce huge earnings growth, total shareholder returns should be satisfactory assuming earnings don't fall off a cliff from here.

With modest earnings growth, dividend payments, and perhaps even slight multiple expansion as the company improves its operating performance, Mattel's total return potential is very attractive.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.