Last week, MAT stock was languishing at a multiyear low price of $13. The company had just reported an absolute earnings dud. Revenues missed. Earnings missed. The North America business collapsed. The dividend was suspended.
All in all, the growth narrative looked broken.
I said buy that dip, arguing that while traditional toys are gradually falling out of favor, Mattel owns the rights to certain brands with secular appeal, including Barbie, Cars, and Hot Wheels. That product portfolio should eventually lead to revenue stabilization. Revenue stabilization on top of massive cost-cutting should get earnings to $1 per share. A 5-year average valuation of those $1 earnings pegged MAT’s fair value around $16.50.
MAT stock is now trading around $17.50, up 35% over the past week and above my fair value estimate. The catalyst? Rumored takeover speculation from Hasbro.
The acquisition talk makes sense. Mattel and Hasbro are America’s largest toy-makers and both have been struggling recently to compete with newer entertainment options for kids. Consolidating operations and resources would allow for huge top-line synergies (think of combining certain toy and action figure story-lines) as well as equally large cost-saving synergies.
Mr. Market likes the deal, too. Not only has MAT stock surged since the rumors hit the tape, but HAS stock has also risen more than 5%.
But just because it makes sense and Mr. Market likes it doesn’t mean a deal will actually go through. And with Mattel trading at a premium to my fair value estimate, I think MAT stock could fall if the deal doesn’t go through.
So what now? I think MAT stock still looks good here, considering the takeover price could be at a huge premium to the current MAT stock price. In fact, I like MAT stock up until about $20.
MAT Stock & The $20 Level
Here’s the math behind my $20 price target.
I maintain that MAT stock has a fair value of $16.50 without the takeover speculation. Moreover, I think Mattel could get taken out around $29.
How do I get there? MAT stock’s market cap has ranged from $5 billion to $16 billion over the past 5 years. Because the current market cap is towards the bottom of that range, it is likely Mattel shareholders reject a deal that puts the value of the company below $10 billion.
A $10 billion market cap translates into a $29 potential takeover price for MAT stock.
But the chances of this deal going through aren’t big. Just given negotiations and anti-trust concerns, these things are usually a wild card. But there is more “wild” here than usual. Namely, MAT stock is really, really beaten up. While that makes it an attractive takeover candidate, it also means MAT shareholders will likely demand a big premium.
Plus, Mattel also has a lot of debt, and that will certainly factor in here. Hasbro isn’t that much bigger (a $10 billion takeover is huge for a $12 billion company). And Hasbro has already had acquisition talks fall through this year. The toy-maker was looking to buy U.S. movie and entertainment company Lions Gate Entertainment Corp. (USA) (NYSE:LGF) earlier this year, but those talks ended without a deal due to price disagreements.
With all those risks and warning signs, I peg the likelihood of HAS buying MAT at 30%.
In this sense, MAT stock has a 30% chance of going to $29 (my best guess for a takeover price), and a 70% chance of going to $16.50 (fair value without takeover). That combination leads to a current fair value for MAT stock of just over $20.
Bottom Line on MAT Stock
Hasbro should buy Mattel. The deal would provide a huge boost to the value of both companies.
But that doesn’t mean this deal will actually happen. In fact, there are many reasons why this deal won’t go through, and that makes the prospects of a huge takeover somewhat bleak at this time.
All in all, though, those prospects are good enough to warrant higher prices for MAT stock. I continue to like this name, even after the huge run, until about $20.
As of this writing, Luke Lango was long MAT stock.