Mattel: Growth Has Returned

Nov. 30, 2019 6:06 AM ETMattel, Inc. (MAT)5 Comments
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Pinxter Analytics
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Summary

  • Mattel has faced a world of pain since revenues began declining in 2013 but have implemented a very successful turnaround plan in 2017.
  • So far, they've cut operating expenses dramatically and have improved gross margins which smashed expectations in the most recent quarter.
  • Given these factors, sales are expected to improve for the first time since 2013 and the company is well positioned for the upcoming holiday season.
  • I remain cautiously bullish on the company's year ahead.

In my first article on Mattel (NASDAQ:MAT), Mattel's Turnaround: A Complete And Total Overview, I highlighted the company's turnaround plan focusing on their strong brands, restructuring their platforms to take advantage of the strong digital media market and licensing agreements for their own content.

The company's share price didn't budge much, but the company's fundamentals have stopped their free fall and are expected to return to growth in the coming year after losing ground since late 2013 when the company first began feeling the full effects of online media transitioning by younger generations.

Quick Turnaround Overview

In today's world, 85% of 3-5 year olds have access to a home tablet where they watch shows and play games and toy companies like Mattel are finding it harder to compete with real physical toys. Mattel introduced a digitalization plan on their investor day in June of 2018, highlighting their vision for a better operating environment where they can regain their competitive edge with their beloved but forgotten toy portfolio in the online and home tablet world.

The core international segment is still growing quite rapidly and Asia-Pacific region nations are experiencing very high demand for learning tools and Mattel is working to capitalize off of this as well by introducing new and innovative solutions to meet the higher demand. The company's focus on effective marketing in the region is a primary driver for their performance in the region and each month they release new digital platforms for learning.

Online, the company has introduced features like the Barbie Vlogs on YouTube (GOOG) (GOOGL) and their own web platforms, as well as clips and shows with their favorite brands around the world. Mattel has also launched a gaming segment where it integrates its beloved characters into online games which are suitable for children and slightly older kids which have seen over 200M downloads since their inception a few years back. The company also took a cue from the likes of Disney (DIS) and has used their stores and locations around the United States and globally to put on shows and plays and have life-size characters roaming around, as well as opening Fischer theme parks across the country.

Company Sustainability

The company is quite strained in cash, holding a little over $200 million in cash and equivalents even as they do hold a higher inventory level as we head into the holiday season when they typically sell most of their products. They hold around $700 million in inventory and $200 million in prepaid expenses.

Mattel has kept debt at the same levels over the past few years and now holds just over $2.8 billion, paying around $180 million every year in interest expense. One of the company's main initiatives was the reduction of expenses like SG&A and general operating expenses, which went from $2.3 billion in 2014 to $1.8 billion in the most recent year, a key factor which allowed them to invest hundreds of millions of dollars in what now looks like a successful turnaround.

After reporting lower revenues every year since 2013, analysts expect the company to report $4.53 billion in sales for 2019, a slight uptick from 2018's $4.5 billion. For 2020, they are expected to report $4.61 billion in sales, a testament to their successful turnaround plan.

On the EPS side, things aren't so pretty for this year as analysts expect the company to report a loss of ($0.41) for 2019. This is an improvement over the past couple of years since it reported a $1 billion loss but still remains under par. For 2020, analysts expect the recovery to show in full force and for the company to report EPS of $0.13, with some expecting it to come in as high as $0.38 per share.

Valuation Update

I continue to believe that the company is undervalued and that it offers a solid opportunity for those looking to capitalize off of the digitalization of the gaming and toy industry as the largest generation in American history (millennials) start having kids but risks certainly remain a cause for concern.

Given the company's successful recovery plan, I believe there is a justification for them trading at the 90x multiple to 2020 earnings they are currently at. That's because they are expected to report robust growth in EPS as they return to normal levels in the years to come. Given these factors, I believe a fair value for the company continues to be around $10.00 per share to $14.00 per share as they show their continued recovery and debt reduction plans.

Investment Conclusion

With the company's solid turnaround plan beginning to bear fruit, I believe that current prices are justified and that those who are looking to capitalize off of the rise in demand for digital streaming and other services in the kids segment but don't want to expose themselves to companies like Netflix (NFLX) or Apple (AAPL) can find that in Mattel.

Even though risks do remain and the overall risk profile remains high for the time being, the upcoming holiday season will act as the ultimate compass to the success of their turnaround plan in the longer run. Overall, their now diversified business can prove to be superior to competitors and allow them to conserve resources to grow their fast-emerging business segments like theme parks and digital content.

Overall, I remain cautiously bullish on the company's year ahead.

This article was written by

Pinxter Analytics profile picture
4.39K Followers
As part of my earnings growth strategy, I invest, trade and write about small under-covered growth companies which don't get much attention from establishment analysts as well as use the strategy to interpret short and long term moves in bigger, well established companies in the United States, Europe and the Asia-Pacific region.-All articles and the information in them are my opinion based on my own research and analysis and should not be taken as investment advice without proper due diligence and advice from a professional financial adviser.

Disclosure: I am/we are long MAT. 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.

Additional disclosure: Opinion, not investment advice.

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