Mattel: a surprising play on global growth that may be primed for a turnaround
Company: Mattel (MAT)
Price: $21.19 (11/9/2007)
P/E ratio: 14.96
Based on revenues, Mattel is the world's largest toy company. It boasts a stable of brands that includes names like Fischer Price, Barbie, and Hot Wheels. The fact that may consider Mattel to be a good value at this point is not exactly a secret, considering the 11/5/07 Barron’s article on the subject and the 11/12/07 JPMorgan upgrade so I figured that I’d keep my write-up on the possible investment short and sweet. I’ve had my eye on this company for a few weeks now. Even with this recent publicity, the Company is still trading within 8% of its 52 week low. I believe that it is a compelling value at this point, trading at a P/E multiple of 14.96, compared with the 23.5 Yahoo! lists for other companies in the “Toys and Games” industry.
Anyone who watches the news knows that domestic toy companies have had to recall a number of toys that were produced in China for various safety reasons, including lead paint. I am not concerned about the recall issue at all. I personally view it as a one time event that affected a number of toy manufacturers, not just Mattel. The Company seems to have learned its lesson and it has taken steps to make sure that similar recalls do not happen again in the future, including inspecting the facilities of Chinese suppliers and increasing the frequency produce inspections. Mattel took a $40 million charge for recalls in the third quarter, but once this charge is out of the way the company should have a clean slate, unlike banks that may end up having to take charges for write downs for a number of quarters to come.
Talk all you want about the recent round of recalls, but the fact is that toy recalls have been going on for years. The media just grabbed a hold of this one with both hands because it related to China and it involved a large number of products. Some suspect that there will be a consumer backlash against toys that are manufactured in China, don’t believe it. Price talks and everything else walks. Heck, just last month China’s trade surplus soared to an all-time monthly high.
Even with the recall issue, analysts expect decent growth from Mattel in 2008. In a recent report, Oppenheimer stated that it expects Mattel's free cash flow to climb 20% next year, to $850 million. It also expects MAT’s EPS to rise by 11% to about $1.75 a share and for it to increase its dividend to $0.75 per share. A $0.75 dividend would represent a 3.5% rate using today’s closing price. Furthermore, Mattel has been buying back a ton of its stock, $600 million so through the first three quarters of the year.
Product-wise, 2008 looks to be shaping up pretty well for Mattel. It has a number of new franchises on deck that should sell well. It owns the rights to produce toys for three major new movies next year, including "Batman The Dark Knight," "Speed Racer" and "KungFu Panda." Judging from what I know about them all three look like they have the potential to be big hits. I just saw a preview for "KungFu Panda" when I took my son to see “Bee Movie” this weekend and it looked great.
These new movies will help drive sales in the U.S., but for me one of the most exciting things about Mattel is its large percentage of foreign sales. I never realized what a global Mattel is. Through September of this year 49% of its sales were international. The further the dollar falls, the more Mattel makes by selling its products abroad. Moreover, these global sales partially insulate the company against a U.S. recession.
Having said all of these bullish things about the company, Mattel is not without its warts. In addition to the potential consumer backlash against Chinese produced goods, Mattel has a ton of debt and the sales of one of its main product lines, Barbie have been sluggish (down 4% in Q3).
Furthermore, while I believe that the recall concerns are completely overblown, the thing that scares me more is the threat of a significant slowdown in the U.S. economy. Long-term I have complete faith that Mattel will be awarded a higher multiple by the market and that it will continue to grow its earnings. However, in the short term I don’t know what this holiday season or the next one will be like. Trying to time the bottom in a stock is always a difficult thing to do. Mattel’s shares have already received a small boost from the aforementioned article and upgrade. I think that I am going to sit on the sidelines for a little while until this one absolutely screams buy, but it’s getting pretty close.
- No position in MAT