Mattel Primed For Success Over Next 2 Years

| About: Mattel, Inc. (MAT)

Summary

MAT stock is up sharply following a strong Q2 earnings report.

The big story in the quarter was a strong Barbie rebound, and we see Barbie momentum continuing in H2 2016.

H2 2016 results will be helped dramatically by the 'Suicide Squad' franchise, as the Joker is already MAT's best-selling DC action figure.

2017 and 2018 will benefit from a plethora of tailwinds, including a first 'Wonder Woman' movie, a first 'Justice League' movie, 'Toy Story 4,' and 'Cars 3.'

Mattel (NASDAQ:MAT) stock is up strongly after the company reported solid Q2 results. A Barbie sales rebound played a big role in the beat, and this is promising considering MAT's true catalysts have yet to spark real growth. We expect 2017 and 2018 will prove to be banner years for MAT, and see upside from here.

The quarter was quite good. Ex-Disney Princess, global POS was up mid-single-digits and worldwide gross sales were up high-single-digits in constant currency terms. North America was strong, and international growth wasn't all that bad considering the tough Disney comp. Asia was actually up, driven by strong growth in China. Latin America was down 7%, but that is mostly a byproduct of Brazil simply being a tough economy to sell anything in right now. In the long term, these macroeconomic concerns should ease, and Latin America growth should concurrently resume. Europe was down only 2%, and up double-digits ex-Disney Princess.

The cost savings plan remained on track, with adjusted SG&A falling $17 million YoY. The company remains on track to deliver $250 to $300 million in 2-year gross cost savings by the end of 2016. We believe that as the company shifts out of FX headwinds and the tough Disney Princess comp, margins should continue to expand even after 2016.

The big story in the quarter was Barbie's comeback. Barbie sales were up 23% in the quarter versus a 3% decline last quarter. Sequentially, sales grew 14% versus a 11% sequential decline in Q2 last year. A quick look into MAT's top-selling Barbies reveals a portfolio dominated by the company's 2-pack President and Vice President dolls, so these sales should persist in 2H16. Barbie momentum seems to be on the uptick and we do not see it slowing down. It is being driven by catalysts that will persist over the next several months (namely, the election).

The company is calling for flat sales growth this year in constant currency, but we actually see upside to this. We think Barbie is just beginning its comeback and has a few double-digit growth quarters in front of it, with especially strong growth in Q3 being driven by politically relevant dolls (the President and Vice President pack). Suicide Squad will also propel Entertainment sales in 2H16. Already, the Joker doll is one of MAT's top-sellers, and the new cast of characters introduced in Suicide Squad makes the film particularly beneficial to toy sales. Even with continued heavy declines in Girls' sales due to lost Disney Princess revenue, we see strong growth in Barbie and Entertainment more than offsetting those YoY declines. We see revenue growing mid single-digits in the back-half of this year and low to mid single-digits for the full-year (constant currency).

The exciting thing about this company is how promising 2017 and 2018 look. We see 2017 as a banner year for MAT. Wonder Woman is already the company's top-selling DC action figure after merely being featured in the Batman v. Superman movie. Next year, she gets her own movie, and that will surely spark Entertainment sales. We also think Wonder Woman will bring girls back to toy store shelves, and MAT will be given an opportunity to cross-sell other Girls-tailored products. Wonder Woman will almost certainly drive strong DD growth in both the Entertainment and Other Girls segments. Moreover, a 2017 Justice League movie gives MAT a bunch of characters from which to sell multiple different action figures.

The biggest 2017 catalyst, though, is a new Cars movie. The last Cars movie was in 2011, so there is a huge opportunity for MAT to sell Cars related toys and memorabilia. Most Cars toys out there are, like the movie, 6 years old. Upgrades are almost guaranteed. Additionally, for MAT's target market of 7-12 year olds, this will be the first time they see a Cars movie in theaters (and remember it). There is essentially an entirely new market of Cars toy buyers.

2018 will be mostly boosted by a fourth Toy Story movie which will invigorate toy sales across the board. Much like Cars, it has been several years since the last Toy Story movie, so MAT will benefit from similar new-buyer and nostalgia tailwinds. The DC Comics Universe is also slated to release a slew of superhero movies in 2018, a significant tailwind for Entertainment sales.

The company has also locked in the next round of Jurassic World sales, and whenever that sequel launches, sales should get a significant boost. As it turns out, dinosaurs are still big-sellers, as evidenced by Hasbro's (NASDAQ:HAS) results last year.

With such huge catalysts on the horizon, we don't see any reason why this stock won't be a DD sales grower and mid-to-high teens earnings grower over the next 5 years. The stock is trading around 19x what we think is a conservative Fy17 EPS estimate. This is not terribly expensive for what we view as a strong growth stock. We were long MAT into earnings and intend to remain long.

For reference and full disclose, we are also long HAS as we feel the toy market at large is set to benefit from several toy-conducive, blockbuster movies over the next several years.

Disclosure: I am/we are long MAT, HAS.

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.