Mattel (NASDAQ:MAT) designs, manufactures, as well as markets toys all over the globe direct to consumer. Mattel has three segments: North America, International, and American Girl. The North American segment sells toys in the US and Canada through the Girls & Boys Brands, Fisher-Price, along with the Construction/Arts & Crafts categories. International segment sells the North American segment brands, some adapted for international markets. The American Girl segment is the marketer, publisher, and retailer for American Girl dolls, accessories, books, and the "My American Girl" and "Bitty Baby" brands, as well as advice & activity books and American Girl magazine.
Since 2013, Mattel's revenues have been decreasing. Specifically dropping $782 million, or just over 12%. With those decreases in revenue, Mattel has seen an even bigger proportionate drop in net income, losing $534 million, or 59% during the same time frame. With the drops in assets and revenues, some efficiencies are starting to get lost: Cost of goods sold is increasing as a percentage of revenues, along with R&D and general/administration costs as a percentage of gross profits.
Total assets have remained steady for the past few years. However, looking closer, investors can see that the reason assets are staying steady is because of an increase in debt, taking on an additional $600 million in total debt since 2012.
Cash Flow Statement
Dividends are killing Mattel's cash flow. Over the past four years, Mattel has paid out nearly $2 billion in dividends to its shareholders. During the same time frame, Mattel has a net change in cash of -$476.31 million, causing Mattel's cash to fall from approximately $1.3 billion in 2012, to $892 million at year-end 2015.
Mattel has the three company killers, decreasing revenues, decreasing net income, and decreasing assets. They all cause each other and it can be a vicious cycle if not turned around quickly. If these trends continue, its future cash flows should be discounted more than its competitors.
Mattel's current price to earnings ratio is 30.28. This is a very high price to earnings for a company that is not showing signs of growth or positive cash flows. Ways to fulfill this P/E ratio would be to decrease the high dividend payments. Mattel's dividend payouts for 2015 totaled $515 million, during which net income was $369 million leading to a payout ratio of 139%. Lowering the dividend can help the company accumulate other assets that would help in raising revenues and eventually net income.
I rate Mattel as a sell. One major reason for this is Mattel has all three qualities that I call "company killers", these are declining assets, revenues, and incomes. The eroding of assets are only being offset by increases in debt. Cash is being drained by a very large dividend that shows no sign of slowing.
Ways to invest
Mattel's earnings call for Q1 is on April 20th. Investors have a few options of how to invest in this opportunity. They can sell MAT short and cover themselves with an option. One good choice for a call would be $37.00 strike for May 20th, 2016. It has a very cheap premium at less than 0.5% of stock price at $0.15/each.
Another choice that investors could pick from would be an option straddle. When picking a straddle, try to look for the lowest combined premiums that are in the money. Strike price at $33.00 seems to be the best combination for a straddle on May 20th. The premiums add up to $2.95, so any decent volatility in the earnings call is going to return pretty well for investors. With split beliefs about this stock from the investing community, a move either way of 8.7% for an earnings call is very probable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.