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Mattel's Headwind Short Lived?

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March 03, 2014 – Comments (0) | RELATED TICKERS: MAT

Board: Value Hounds

Author: TMFRichDad

MAT sold off significantly recently due in part to a disappointing earnings report. Sales were weaker (poor Christmas) than expected. Also, MAT had aggressively filled the channel in anticipation of stronger sales for the holiday and now that leaves excess inventory sitting on the shelves which will serve as a headwind in the near term.

That said, I'm of the mindset that these issues will be rather short lived. Compared with many alternatives available in the market today, MAT offers a compelling value for dividend minded investors. Quite simply here's one way I look at the valuation:

Current Price: $37.31
Current Divi: $1.52
Current Yield: 4.1%

5-year average annual Divi Growth = 13.94%
MAT's Long Term Growth Goal = 6 to 8%

In a minute I'll give the results of plugging these stats into the Payback calculator I posted about here:

http://boards.fool.com/payback-period-30809736.aspx?sort=pos...

(The origin site for the calculator seems to have disappeared now unfortunately.)

But, before I do I'd like to point out that right now there are a whole slew of stocks available today that pay 3% with nearly identical future long term growth prospects. KO (which I own), PEP, PG, K, etc come to mind as examples. So, I've included in the following table, for comparison purposes, an equivalent stock offering a 3% current yield along with the identical growth rate.

[See Post for Tables]

So, owning MAT offers the potential to receive your initial invested capital back, in dividends alone, somewhere between 1.5 and 3.0 years sooner than the "average" alternative in the market place right now. That's pretty good in today's market.

Fwiw, 2 years ago or better, my desired payback threshold before buying was around 13 or 14 years. Along with that, my metric for "fair value" was about a 17 or 18 year payback which corresponded to what my "average" evaluated company seemed to be trading at. Those days are long gone in wishing for 13 or 14 year paybacks given the market's run-up over the last 2 years. But, the 17 or 18 years fair value still seems to hold for many stocks. I offer these statistics to help you with understanding this payback metric as I suspect many are unfamiliar with using it.

Now with that groundwork laid, the question that needs to be answered before deciding whether MAT is undervalued or not is: Does MAT offer similar risk characteristics as those 3% yielding alternatives? If it does, than it is undervalued. If it doesn't than it isn't. (The payback function does not use a discount rate which is often adjusted to reflect "risk" in a conventional DCF analysis. So, in applying the payback analysis risk needs to be evaluated separately).

All things considered, I think that if there is a smidgen of higher risk in owning MAT, than I'm being compensated for it adequately. You may disagree but give it a look before you decide.

Combining the payback function and Excel's goal seek function allows the calculation of a fair value price given a growth rate and, say, a 17.5 year payback as defining "fair value". For MAT, that works out to this:

[See Post for Tables]

So, by these calculations a reasonable fair value range for MAT is $45 to $55. At today's price, MAT then offers a MoS of between 21% and 45%.

Rich - a student of unconventional valuation techniques.

ps: Long MAT and KO

pss: MAT announced yesterday the acquisition of MEGA Brands. Here's the PR:

http://investor.shareholder.com/mattel/releases.cfm

 

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