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Does This Huge Rally In Mattel, Inc. Stock Have Room To Run Higher?

With an M&A catalyst, MAT stock looks good to about $20

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And just like that, toy-maker Mattel, Inc. (NASDAQ:MAT) is bouncing back thanks to takeover speculation from larger rival Hasbro, Inc. (NASDAQ:HAS).

MAT Stock: Does This Huge Rally In Mattel, Inc. Stock Have Room To Run Higher?
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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.

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