Mattel, Inc. Stock Is a Buy If You Don’t Mind the Wild Ride

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Toy maker Mattel, Inc. (NASAQ:MAT) reported earnings on Oct. 26, and ever since then, MAT stock has been subject to wild trading on huge volume.

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Why? MAT is a cheap stock with lots of debt, a broken growth narrative and some takeover speculation, immersed in an industry that was just shaken with a massive bankruptcy.

Earnings Dud Sends MAT Stock Down Big

The wild trading began on Oct. 26 when Mattel announced what was nothing short of an earnings dud. Revenues missed. Earnings missed. The North America business collapsed. The dividend was suspended.

Most investors saw this coming. Heading into the report, MAT stock had been sliced in half year-to-date ($30 to $15). Traditional toys have slowly been falling out of favor as technology has forced “child playtime” to evolve. Instead of playing with action figures and dressing up dolls, kids can now play with high-tech gadgets or even fool around on Mom or Dad’s smartphone or tablet.

In other words, there are plenty of options out there for kids outside of the traditional toys Mattel makes. That is why Mattel’s weakness is broad and across every toy category. Barbie revenue fell 6%. Other Girls revenue (think DC Super Hero) fell 40%. Wheels revenue fell 4%. Fisher-Price revenue fell 15%. American Girl revenue fell 30%. Construction brands revenue fell 29%.

The broad-based weakness across the entire toy category is what led to Toys R Us recently declaring bankruptcy. That bankruptcy obviously hurt Mattel sales. North America revenues fell 22% in the quarter.

Thus, with toy demand seemingly in a massive retreat and the dividend suspended, investors headed for the exits. MAT stock traded down from $15 to $12 after the earnings report.

Takeover Speculation Sends MAT Stock Up Big, Then Back Down

But MAT stock didn’t spend much time at $12.

BMO Capital came out and said that with the valuation now so low, MAT was an attractive takeover target. Investors apparently believed BMO, and MAT stock bounced back to $15.

But then DA Davidson came out the next day and quelled takeover hopes. They said that there is simply too much debt and not enough profits for Mattel to be considered anything close to an attractive takeover target. MAT stock traded down to $14 on that report.

What To Do With MAT Stock

A takeover likely won’t happen.

It is easy to look at Netflix, Inc. (NASDAQ:NFLX) acquiring little-known Millarworld and say that media conglomerates are aggressively looking to acquire content. That is probably true. As the over-the-top streaming video wars escalate, competitors will likely look to widen their content pipeline. One way to do that is buy smaller players with good content.

But Mattel doesn’t have that valuable of a content pipeline.

Look at Millarworld. The comic book publisher owned the rights to multiple compelling characters with unique story-lines. It was the type of the content that was made to be turned into a Netflix original series.

Mattel? Not so much.

But MAT stock doesn’t need takeover speculation to be an attractive investment at these levels.

Earnings are getting killed this year, but they should be able to normalize due to major cost-cutting initiatives (the company plans to eliminate $650 million in net costs over the next 2 years). Thus, while it is unlikely earnings return to the $2.50-plus level they were at in 2013, it is likely that earnings bounce back to about $1 per share by 2019 (Street is sitting at $1.06).

The 5-year average price-to-earnings multiple for MAT stock is about 22. Throw that 22-times multiple on a $1 earnings per share in 2019, and you get a 2-year forward price target of about $22. Discount that back by 15% per year. Fair value on MAT stock stands just over $16.50.

Bottom Line on MAT Stock

It is tough to buy into this name because the growth narrative appears broken, volatility is high, and the trend is clearly down.

But if you can afford to buy and hold for several years, then MAT stock is worth a look. Traditional toys have new competition, but the business isn’t going anyway anytime soon. Cost-savings should help bring margins back up. Overall, this is a stable story that should be able to get back $1-plus earnings per share power.

A $14 stock price is just too low for a company that has stable earnings of about $1 per share.

Eventually, the market will realize this, sentiment will rebound, and MAT stock will head higher.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/mat-stock-wild-ride/.

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