Even With Earnings Growth, Mattel's Upside Is Limited

| About: Mattel, Inc. (MAT)

Summary

While Mattel's sales and earnings have been to the upside, I see limited return potential.

I believe the company to be overvalued at a P/E ratio of 29.

In this regard, I do not take an overly bullish view on MAT.

With sales coming in higher than expected, along with earnings beating analyst expectations, Mattel, Inc. (NASDAQ:MAT) has prompted speculations the company may be due for significant upside after a long and drawn out losing streak, with lower Barbie sales having been a significant drain on it.

However, in spite of higher earnings and growth prospects, I take the view that Mattel's P/E ratio is still significantly overvalued compared to historical averages. In this context, upside remains limited. Assuming that dividends continue to grow by an average of 10% year on year, along with an assumed terminal P/E ratio of 29.48x, I conduct two scenario calculations using the Dividend Discount Model; one assuming no earnings growth and another assuming 10% earnings growth year on year.

0% earnings growth

Dividend Per Share Forecast (2016-20)
2016E 2017E 2018E 2019E 2020E
Projected 10% dividend growth 1.67 1.84 2.02 2.23 2.45
7% discount rate 1.56 1.61 1.65 1.70 1.75
Earnings Per Share Forecast (2016-20)
2016E 2017E 2018E 2019E 2020E
Projected 10% earnings growth 1.08 1.08 1.08 1.08 1.08
7% discount rate 1.01 0.94 0.88 0.82 0.77
Terminal P/E Ratio (which is the current one) 29.48
Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) 22.70
Present Value of Dividends Per Share Through to 2020 8.263657795
Target Price in Year 2020 30.9639969719
Upside from price of $32.11 -3.57%
5-Year Annualized Rate of Return -0.71%

10% earnings growth

Dividend Per Share Forecast (2016-20)
2016E 2017E 2018E 2019E 2020E
Projected 10% dividend growth 1.67 1.84 2.02 2.23 2.45
7% discount rate 1.56 1.61 1.65 1.70 1.75
Earnings Per Share Forecast (2016-20)
2016E 2017E 2018E 2019E 2020E
Projected 10% earnings growth 1.08 1.19 1.31 1.44 1.58
7% discount rate 1.01 1.04 1.07 1.10 1.13
Terminal P/E Ratio (which is the current one) 29.48
Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) 33.24
Present Value of Dividends Per Share Through to 2020 8.263657795
Target Price in Year 2020 41.4992243839
Upside from price of $32.11 29.24%
5-Year Annualized Rate of Return 5.85%

From the above, we see that in the case of no earnings growth, there is clearly no upside from the current price of $32.11 at the time of writing. However, assuming that earnings grow in line with dividends (at an average of 10% per year), we see that we yield a five-year target price of $41.49, which represents an annualized rate of return of just over 5 percent. In my opinion, this level of return is too low to justify the currently high valuation. Should earnings growth continue to stall, then it is highly unlikely that the P/E ratio would stay at such a historical high. Instead, I expect the P/E ratio to go lower in this instance, and upside would be even more limited even with 10% earnings growth.

For instance, let us assume that the P/E ratio declines to a level of 20x, a level more representative of historical averages. At this ratio, we would still yield a negative return even with 10% growth.

Terminal P/E Ratio (which is the current one) 20
Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) 15.40
Present Value of Dividends Per Share Through to 2020 8.263657795
Target Price in Year 2020 23.6641592719
Upside from price of $32.11 -26.30%
5-Year Annualized Rate of Return -5.26%

To conclude, I see Mattel as being significantly overvalued at the current P/E ratio. While earnings growth may continue, I see the limited upside as providing too little justification for investment at the current valuation.

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.

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Tagged: , Toys & Games, Earnings
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