We read an article on the web a few days ago asking if Mattel, Inc. (NYSE: MAT) was a good buy at $20. Admittedly, the Toys and Games industry isn't one we pay much attention to. Not for any particular reason, we just don't seem to have much investment interest in the industry.
Certainly we have heard of Mattel, and because we had, we assumed that the $20 price tag stated in the article seemed pretty low to us, just based on the brands we were aware the company owned.
But once the toys were out of the box, we realized it was going to take some time to clean up the mess.
Financial information contained in this report is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on February 26, 2009.
What They Do
The company designs, manufactures, and markets a broad variety of toy products through sales to its customers and directly to consumers.
It's portfolio of brands and products include Barbie®, Polly Pocket®, Little Mommy®, Disney Classics, High School Musical™, Hot Wheels®, Matchbox®, Speed Racer®, Tyco R/C®, CARS™, Radica®, Speed Racer®, Batman®, Kung Fu Panda®, Fisher-Price®, Little People®, BabyGear™, View-Master®, Sesame Street®, Dora the Explorer®, Winnie the Pooh™, Go-Diego-Go!™, See ‘N Say®, Power Wheels®, and American Girl Brands including Just Like You® and Bitty Baby®.
The company was incorporated in California in 1948 and reincorporated in Delaware in 1968.
With a recent close of $20.04, and first resistance of $21.05, the stock currently has an upside reward of 5%. Conversely, with first support at $17.82, the stock currently has a downside risk of 11%.
The current trend line tells us that the stock is just coming out of an oversold condition, making for a nice short-term trade, assuming traders are willing to take on the risk, since we don't see the stock price moving above current resistance in the near future.
However, the markets seems to think that the company is going to announce very good fourth quarter and fiscal 2009 earnings, and in review of the company's recent Form 10-Q filings, we think the markets are grossly over enthusiastic about the stock.
Long-Term (5 Year Hold) Investment
The company's financial statements are to us, sickening.
We fail to understand how the management of a company that has been in business more than 60 years, with the easily recognizable brands the company owns, can in good conscience, justify their existence, much less their jobs.
To us the company's Current Ratio, Quick Ratio, and Cash Ratio, were all below what we consider investment quality.
In addition, Free Cash Flow at $0.82 per share was also well below what we consider investment quality. We were also not big fans of the company's Total Debt at $2.48 per share. Not because we think it is excessive, we don't, but because with that debt came an Average Interest Rate of over 9%, which we think given the world economic climate, is mind boggling!
Couple all of that with almost 23% of Total Assets being made up of Goodwill and Intangibles, and excuse us Mr. Eckert, why was your FY 2008 compensation package just a touch under $7 million?
We looked through the company's financials for the first three quarters of fiscal 2009 and see little changed from fiscal 2008.
In order for the company to exceed fiscal 2008 Sales, the final quarter of fiscal 2009 would have to above $2.5 billion, a quarterly Sales number the company has never seen.
We valued the company based on fiscal 2008 financial information in the $27 range.
Considering the financial information we looked at for fiscal 2009, and making allowances for a 4th quarter that we don't think will impress anyone, we believe that our valuation for the company will be adjusted downward, closer to the company's approximate 10 year average price of $21.
For the Wax Ink Mattell Raw Value worksheet, please click here.
Disclosure: No Positions