Mattel: Earnings Preview

Feb. 1.11 | About: Mattel, Inc. (MAT)

Mattel Inc. (NASDAQ:MAT) the world’s largest manufacturer of toys is slated to release its fourth-quarter results on Wednesday, February 2, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is 86 cents per share, representing an annualized growth of 6.26%. The Zacks Consensus Sales estimate for the fourth quarter is $2,074 million.

With respect to earnings surprises over the trailing four quarters, Mattelhas oscillated greatly from approximately negative 6.67% to positive 333.3%. The average earnings surprise was a positive 87.1%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

Mattel reported third quarter 2010 earnings of 77 cents per share, beating the Zacks Consensus Estimate by a penny and up from 63 cents in the prior-year quarter. Earnings included a tax benefit of 5 cents per share.

The result was primarily driven by strong sales of its core brands such as Barbie, solid contribution from Toy Story 3 and World Wrestling Entertainment properties, partly offset by declines in Hot Wheels and Fisher-Price Brands as well as cost escalation.

Worldwide gross sales were $1996.9 million, ahead of $1955.9 million recorded in the prior-year period as well as the Zacks Consensus Estimate of $1940.0 million. U.S. gross sales improved 3% year over year and international gross sales increased 2% year over year.

Including the negative impact of foreign currency fluctuation, net sales were $1833.1 million, up 2% year over year.

Estimates Revisions Trend

Estimates for the coming quarter remained unchanged in the last 30 days, implying that the analysts are maintaining their view on the stock.

Agreement of Estimate Revisions

In the last 30 days, out of 15 analysts covering the stock, 1 analyst increased its fourth quarter and fiscal 2010 estimates and 1 reduced his/her estimate for the respective quarter and year, thus providing no directional movement.

Additionally, 1 out of the 15 covering the stock raised his/her estimates for full fiscal 2011. However, none of the analysts slashed the estimate for 2011.

The analysts raised the estimates based on the company’s strong product line in 2011 with film releases including Cars 2 and Green Lantern. The top line is also expected to benefit from new product lines in 2010 for World Wrestling Entertainment, Toy Story 3 and Thomas and Friends. The margin of the company is expected to expand through costcutting initiatives.

None of the analysts made any revision to their forecasts over the 7-day period, thus providing no clear directional pressure.

Magnitude of Estimate Revisions

Over the past 30 days, Mattel’s estimates for the upcoming quarter did not budge. Therefore, the analysts expect the company to report in line. However, the Zacks Consensus Estimate for 2010 inched up by a penny to $1.84 and remained unchanged at $1.96 for 2011 in the last 30 days.

Maintain Neutral Rating

We expect Mattel to report fourth quarter 2010 results in line with the Zacks Consensus Estimate, which is up by a penny from the consensus estimate. However, total revenue of the company is expected to suffer as the toy industry experienced weaker demand in December partly due to tough weather conditions.

Moreover, margins are estimated to remain under pressure in the fourth quarter due to input cost inflation and higher royalty expense.

We have a Neutral rating on Mattel as it has an industry leading position, a strong balance sheet and continues to experience the benefits of its cost containment initiatives. Mattel remains on track to exceed its year end 2010 goal of $180-200 million cumulative cost savings.

The company also remains committed to build shareholder value by repurchasing shares and distributing dividend, as a result of which in November 2010, the company increased its share repurchase program by an additional $500 million and also raised its annual dividend for 2010 to 83 cents per share from 75 cents per share in 2009.

However, we remain cautious on the stock on account ofincreasing input costs and adverse impact from currency exchange rate. Moreover, competition from private label toys and video game industry is increasing and orders from retailers remain conservative.

One of Mattel’s primary competitors, Hasbro Inc. (NASDAQ:HAS) is expected to announce its fourth quarter results on February 7, 2011. However, in its preliminary results announcement Hasbro said that total revenue is expected to be down 7% in the fourth quarter as demand for toys during the crucial holiday season was low due to tough weather conditions and price increase by retailers.