For the first time in the last month or so, I was able to spend the weekend with my family without worrying about massive government intervention programs or failed financial institutions. I even played Barbie Dolls with my five year old daughter, Julia.
It was wonderful imaginative play. Since most kids seem to be gravitating towards video games I was encouraged that my daughter was incredibly immersed and connected to her dolls and their world.
One benefit of her fondness for Barbie is that her interest is much cheaper than feeding a video game addiction. As we played I wondered if the owner of the Barbie brand, Mattel Inc. (MAT), could benefit from the economic slowness.
Will more simplistic products like Barbie sell better in down times?
If so, shares of MAT may benefit. Then again, the horrible retail conditions that drive buyers to simpler products like Barbie would be a detriment to its other higher priced products.
Frankly, despite being a simple product, Barbie is no bargain. When you factor in expensive accessories and limited release items, feeding a Barbie habit takes a strong economy.
I guess my inclination may be right, but in reality MAT makes big dollars on Barbie and other products by charging higher prices. That pricing power may evaporate in difficult economic times.
At the same time, expenses for manufacturing Barbie and other products is going up. MAT released earnings for its third quarter that missed Wall Street expectations. The main reason for the miss was that its costs were rising.
Even though sales for brands like Fisher-Price and American Girl grew, profits were only 1% higher than in the same time frame last year. MAT made $238.1 million or $.61 per share in the quarter. Wall Street expected the company to make a profit of $.71.
That big miss resulted in shares continuing a two-year slump. On an up day for stocks, MAT was down nearly 5%. At $13 and change, shares of MAT are well off its highs above $30 reached in early 2007.
I was a fan of MAT in my Rational Investor days back in 2005. At that time shares traded for around $15 and were incredibly undervalued given future growth expectations. Yesterday, with shares below that level, can we say the same thing?
Possibly, but the weakness in the economy makes things different this time around. If the current downturn is protracted earnings at MAT may miss estimates going forward. Those estimates have held relatively steady up until this current release.
Has the market sufficiently discounted weaker results? At current levels shares trade for a single multiple of current expectations. I suspect there may be some reductions in those estimates.
If so, the valuation is higher. At the moment, MAT seems to be fairly priced. I would want a bit more of a discount to offset what are sure to be earnings misses going forward.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
