In an era of video games and digital everything, traditional toy manufacturers haven’t generated much excitement. Of course, that’s the least of Mattel, Inc.’s (NASDAQ:MAT) problems. MAT stock seems to regularly find new ways to horrify investors. Still, we occasionally see signs of life, and Friday was one of those events, with MAT shares jumping 10%.
Should investors finally believe in Mattel stock?
Technically speaking, the embattled toy manufacturer did itself a whole lot of good. With the double-digit move, MAT broke through a horizontal support line established at around the $16 level. The spike rally was also significant because it firmly stopped a week-and-a-half of declines.
But if you’re thinking that “this time, it’s different,” then you might be right under the broken clock theory. But the house advantage in this case is heavily stacked against you.
MAT stock is simply rising due to speculative trading. How else can you explain the sudden, enthusiastic burst? It’s just-released fourth quarter 2017 earnings report was atrocious, and this is no hyperbole. At InvestorPlace, we use the term “detrimental,” ranking MAT a “strong sell.” Indeed, you will not find too many covering analysts adopting the optimistic view.
The ones that do are probably the type that find images of religious figures on their morning toast.
MAT stock is Hoping for a Buyout
To recap, let’s look at those Q4 figures; a cursory glance is really all it takes to gain a solid understanding. Wall Street forecasted a 17-cent earnings per share target. Although Mattel stock has a history of disappointing consensus estimates, this forecast was very much reasonable. If anybody is going to buy toys, they’re going to do it during the holiday season.
Alas, it was not to be. Rather than approaching that target, MAT stock didn’t even up in positive territory. Instead, it veritably cratered, “hauling” in a loss of 72 cents. Obviously detrimental, I’m not really sure if words exist to describe this situation.
Analysts reasonably expected MAT to improve upon its Q3 report, which saw EPS at 9 cents. True, this report was also badly disappointing, producing an earnings surprise of -84.2%. However, the company has been producing positive EPS in the second half of the year since at least fiscal 2014.
If the organization didn’t have such a powerful brand name, I’d expect Mattel stock to implode. As it stands, the most realistic option for the company’s survival is to be bought out. Having lost the extremely lucrative Walt Disney Co (NYSE:DIS) licensing deal, MAT has unfortunately been rudderless.
The obvious suitor is Hasbro, Inc. (NASDAQ:HAS), to which Mattel lost the Disney deal. If the deal were to go through, it would represent a complete reversal of fortune. In 1996, Mattel attempted to buy out Hasbro, but Hasbro declined, citing regulatory concerns. To pass antitrust muster, both companies may have been forced to sell several top-selling brands.
Those same concerns still exist today, which is why I’m not too keen on MAT stock.
Toy Companies Like Mattel Will Inevitably Struggle
Another reason why I’m not lunging for Mattel stock is the underlying industry. We live in a new world. Kids today are born with a smartphone in one hand, and a video game controller in the other. Worse yet, this transition has been decades in the making.
During the 1980s and 1990s, the Millennial coworkers you hate so much were playing Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY). In the 2000s era, Sony Corp (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) dominated the high-definition gaming sector. Moving forward, I expect Sony and an elite few to rule virtual reality.
Subsequently, these companies I just mentioned have been on the rise in recent years. In sharp contrast, MAT stock is the proverbial bug looking for a windshield to end its misery.
Of course, if Hasbro acquires Mattel, the two can merge as a super toy manufacturer. The idea resonates with Wall Street considering other headwinds, such as toy store closures. Furthermore, regulators may greenlight a potential deal since the toy industry has changed so much, and so badly.
Therefore, it’s not entirely out of the question that MAT stock could fly higher from here. However, when your investment thesis comes down to just one argument, this is a gamble, not an investment.
As of this writing, Josh Enomoto was long SNE stock.