Mattel Stock Just Isn’t Fun Any More (MAT)

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Alas, the days when Mattel, Inc. (NYSE:MAT) was one of the big names in toys are long gone. Kids these days play video games and watch content on any streaming channels they like. Well, there’s always Barbie.

Mattel Stock Just Isn't Fun Anymore (MAT)MAT earnings were pretty sad. Let’s parse the numbers and see what we can glean from it all and what it means for Mattel stock.

Mattel global sales rose 5% in constant currency, although if you drop the currency effects back in, then sales were down 2%. North American sales were up 9% in constant currency, whereas international sales rose 2%. When you factor in currency, international sales were clobbered, down 14%.

Mattel reported an operating loss — it’s weird just writing those words because who would ever think Mattel would report losses? Mattel stock earnings were officially an operating loss of $14.6 million compared to adjusted operating income (sigh) of $27.7 million year-over-year. Regular operating loss was $54.5 million compared to operating income (sigh) of $6.2 million year-over-year.

That’s a 17-cent loss per share versus 3 cents last year for Mattel stock.

Mattel’s time-tested brands just aren’t clicking anymore. Barbie sales fell 5% on constant currency. American Girl, with its insanely expensive dolls and accessories, came in flat on constant currency. My old childhood friends Matchbox and HotWheels did come through, up 10% in constant currency.

Still, MAT isn’t going away. It has $683 million in cash and $2.1 billion in debt that only accrues at 4% interest. It’s not great news for Mattel stock, though, since operating cash flow was negative to the tune of $53 million.

The thing about Mattel, as a toy company, is that it doesn’t has the blockbuster brands and consistently new brands that Walt Disney Co (NYSE:DIS) manufactures by pumping out new movies every year.

Mattel stock losses are pretty depressing, although the new Mattel CEO promised a “rapid redo” of the toy business. His predecessor was bounced in January.

I’ve already hinted at the core issues. MAT is going to have a very hard time competing with Disney, and all the brands it has under its umbrella — Marvel, Pixar and Lucasfilm, along with all the internally-generated content.

Aside from that, though, there seems to be a fundamental lack of inspiration at Mattel. MAT needs some juice from whomever is squirreled away in the Invention Room. Where are the cool toys?

It’s only going to get worse. The invasion of smartphones, tablets, desktops and “anywhere, anytime content” will be perpetual competition for old-fashioned toy makers. They’ll always have a place, but whereas 20 years ago their future seemed secure, today that future looks pretty bleak.

Analysts seem to think MAT earnings will pull out $1.46 in EPS this year and $1.59 next year. So that means flat this year and 10% growth next year. Five-year averages are at 5.4%.

I’m skeptical about all of these estimates. Basically, you’re paying 16x for 5% growth.

Now, the good news is there is a generous 6.4% dividend that’s likely sustainable unless negative cash flow keeps hitting the company. In previous years, the company generated around $600 million in free cash flow and paid out most of it as that dividend.

I think if you believe there can be a turnaround for MAT earnings, then the cash flow keeps the dividend sustainable and you have some upside. However, if earnings keep delivering losses and negative operating cash flow, then you’d better sell Mattel stock, because that dividend will get cut.

As of this writing, Lawrence Meyers owned shares of DIS.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/mattel-stock-just-isnt-fun-anymore-mat/.

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