Spin Master Continues Acquisitions With Orbeez Deal

Summary

• Spin Master announced that it has acquired the Orbeez brand from Maya Toys.
• Orbeez toys are small seeds that grow into a round form when water is added.
• SNMSF continues to be an active acquirer of brands as it seeks to obtain deeper penetration within its target segments.
• The stock appears richly valued at its current level, as do other toy marketers, so my bias is NEUTRAL.
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Quick Take

Spin Master (OTCPK:SNMSF) announced it has acquired Orbeez for an undisclosed amount.

Orbeez, developed by Maya Toys, operates as an activity toys brand.

SNMSF continues to acquire brands as it seeks deeper penetration in its target markets, but the stock appears richly valued at its current level, so my bias is NEUTRAL.

Target Brand

Huntington Beach, California-based Maya Toys founded in 1992, which developed the Orbeez brand of superabsorbent polymers that grow 100 times in water, and operates as a toy company. Source: Maya Toys

Spin Master is acquiring the Orbeez brand from Maya Toys.

Orbeez's primary offerings include:

• Ultimate Soothing Spa

• Spin and Soothe Hand Spa

• Super Sweet Shoppe

• Wowzer Surprise

• Orbeez Squeezables

• Massaging Body Spa

• Sweet Treats Studio

Market & Competition

According to a market research report by Grand View Research, the toys and games market was valued at $101.5 billion in 2018 and is projected to reach $139.2 billion by 2025.

This represents a forecast CAGR of 4.6% between 2019 and 2025.

The main drivers for this expected growth are the commercialization of movies and cartoon characters, as well as an increase in consumer disposable income.

The Asia Pacific region held the largest market share in 2018 and is anticipated to grow at an annual rate of 5.1% over the forecast period.

Major vendors that manufacture toys include:

• Lego

• Mattel (MAT)

• Namco Bandai (TYO:7832)

• Hasbro (HAS)

• JAKKS Pacific (JAKK)

Source: Sentieo

Acquisition Terms and Financial

Spin Master didn't disclose the acquisition price and terms and didn't provide a change in financial guidance, so the deal was likely for a financially non-material amount.

A review of the firm's most recent published financial results indicates that, as of September 30, 2019, Spin Master had $151.4 million in cash and equivalents and $590.3 million in total liabilities and no long-term debt.

Free cash flow for the twelve months ended September 30, 2019, was $121.1 million.

In the past 12 months, SNMSF's stock price has risen 3.41% vs. the U.S. Leisure industry's growth of 22.2% and the overall U.S. Market's rise of 22.0%, as the chart and corporate events graphic indicates below:

Source: Seeking Alpha

Revenue surprises versus analyst consensus estimates have been positive in eight of the last twelve quarters, as the chart shows below. Notably, four of the negative surprises have been in the last five quarters:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has dropped sharply, as the linguistic analysis shows here:

Source: Sentieo

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure	Amount
Market Capitalization	$3,080,000,000
Enterprise Value	$3,010,000,000
Price / Sales	2.02
Enterprise Value / Sales	1.98
Enterprise Value / EBITDA	20.03
Earnings Per Share	$0.89
Total Debt To Equity	10.53%
Free Cash Flow [TTM]	$48,100,000
Revenue Growth Rate	-8.18%

Click to enlarge

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Assuming the above general DCF parameters, the firm's shares would be valued at approximately $18.39 versus the current price of $30.86, indicating the stock is currently potentially overvalued, with the given assumptions of the DCF.

Commentary

Spin Master acquired Orbeez brand toys from Maya as Spin Master believes it can continue to develop the Orbeez technology and brand.

As Spin Master's Co-founder and CEO Anton Rabie stated in the deal announcement,

Orbeez represents a universally-appealing play pattern and as a result, this amazing Maya Toys property has stimulated the imaginations of millions of children globally. We're thrilled with this acquisition, which further strengthens our vibrant and growing Activities business, providing recurring revenue and opportunities for integration into our existing product lines, as well as for further innovation.

Spin Master has been a very active acquirer of brands that it views have a good fit in its product portfolio.

Notably, management said it has seen acquisition price inflation in its takeover targets.

While we don't know the price it paid for the Orbeez brand, I'll take management's word that they are exerting discipline in the price paid for it.

However, SNMSF's stock appears overvalued at its current level. To be fair, other toy producer stocks are even more overvalued, including Hasbro and Mattel.

Also, all three are showing revenue contraction, so the industry is not exactly in a happy place in the current environment.

Given the firm's revenue trajectory and valuation, my bias on SNMSF is NEUTRAL.

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.