Mattel - How Barbie Triggers A Sell-Off

| About: Mattel, Inc. (MAT)

Shares of toy manufacturer Mattel (MAT) fell 9% in today's trading session after releasing a disappointing earnings report.

First Quarter Results
Mattel reported net income of $7.8 million for the first quarter of 2012 compared to a profit of $16.6 million in the period last year. Earnings per share of $0.02 came in below expectations of $0.07 as the toy manufacturer took a $0.04 charge related to the acquisition of HIT Entertainment.

Revenues fell 2.5% to $928 million while analysts were expecting a growth around 3.5% to $986 million, as global Barbie sales fell 6% after good years in 2010 and 2011. American and European retailers are reducing inventory levels which explains the disappointing quarter. According to Mattel retail partners reduced inventories by mid to high single digit rates, particularly for the Barbie line. As a result US sales fell 9% while international sales were still up 7%.

Despite the disappointing results Mattel's board of directors declare a $0.31 quarterly dividend. Furthermore the company reported that it repurchased some 700,000 stock during the quarter.

Mattel ended its first quarter with $785 million in cash & equivalents and approximately $1.15 billion in long term debt, leaving a net debt position of roughly $360 million. This comes after the company finalized its $680 million all cash acquisition of HIT Entertainment.

After today's decline the market values the firm at $10.5 billion which represents a 1.7 times annual revenue multiple and about 13.5 times 2011's earnings. This indicates that Mattel trades at a premium compared to its main competitor Hasbro (HAS) which trades at 1.1 times annual revenues and 12 times earnings.

The company pays a fat dividend yield of $0.31 per quarter, for an annual dividend yield of 4.0%

Investment Thesis

Shares of Mattel have been in a steady upwards trend over the last two years on the back of a revitalized Barbie line which boosted revenue growth and expanded margins from 6.4% in 2008 till 12.3% in 2011. Shares moved from $20 in the beginning of 2010 to all time highs of $35 in the last couple of weeks. After today's correction, when shares fell $3 in a single day, Mattel trades around $31 which marks a serious correction in the stock.

While the company generates the majority of revenues and profits in the final half of the year the warnings signs for the first quarter are being picked up by investors. Today's sell of is rather fierce and could provide long term investors who expect the company to bounce back in the second quarter with an excellent entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.