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Mattel Inc: cash flow valuation

|Includes: Mattel, Inc. (MAT)
Current Price: ~ $28/share
Projected Yield: ~ 3.30%
 
Mattel manufactures toys under several brands names, which include Barbie, Hot Wheels, Fisher Price, and American Girl. The company also produces toys under exclusive entertainment licenses. Its customers are mainly mass retailers and specialty toy stores. Under the American Girl name, Mattel owns retail shops in New York, Chicago, and Los Angeles. The company manufactures and distributes its toys in the United States and internationally.
 
I estimated the firm's WACC today at 11.30% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
Recent free cash flows and growth rates:
Year
FCF $Millions
2001
562
2002
1032
2003
404
2004
427
2005
330
2006
743
2007
414
2008
238
2009
825
2010
391
TTM
572
 
Average Annual Growth FCF: ~ 26%
CAGR FCF: ~ -4%
Consensus Forecast Industry 5-Year Growth: ~ 10% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
 
Scenario 1
Average FCF in last two years is $608 million.  Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
608
1
663
2
722
3
787
4
858
5
935
Terminal Value
9026
 
The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $8143 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $6913 million.  $6913 million / 348 million outstanding shares is approximately $20 per share and a 20% margin of safety is $16/share.
 

Scenario 2
Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and then a growth rate in FCF of 4% per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
608
1
663
2
722
3
787
4
858
5
935
Terminal Value
13975
 
The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $11,040 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $9810 million.  $9810 million / 348 million outstanding shares is approximately $28 per share and a 20% margin of safety is $23/share.
 
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.