Following Guidance Surprise, Avoid Toying with Mattel Stock

After appearing to make a comeback, Mattel (NASDAQ:MAT) again finds itself losing the confidence of investors. The toymaker issued weak guidance just one week after indicating differently in its Feb. 7 quarterly report. Mattel stock dived in mid-day trading following the news.

Mattel stock MAT stock

This likely means a state of decline will continue for the maker of Barbie, Hot Wheels, Fisher-Price, and other iconic toy brands. It also calls into question what will happen to Mattel’s current management team, and maybe Mattel itself.

Considering the renewed level of uncertainty surrounding the toymaker, I think investors should stay away from MAT stock.

A Wild February for Mattel Stock

This news stands in contrast to the previous earnings report. When the company announced fourth quarter and full year 2018 earnings on Feb. 7. At that time, they stated, “2018 was a great year for Barbie, which sustained growth and continued momentum globally.”

They concluded by saying they looked forward to celebrating the 60th anniversary of the iconic doll in 2019. The stock saw a one-day pop of 23.7% following the news.

One week later, while at an analyst meeting, they downgraded forward guidance, citing slowing Barbie sales. Not only is this bad news for MAT, but it also calls into question why they did not bring this up during quarterly earnings.

This unnerved investors as Mattel stock nosedived in the final 80 minutes of Friday trading. As a result, Mattel stock plunged by more than 18% on the trading day.

A Comeback Delayed

This comes as a huge setback for those hoping for a long-awaited comeback in Mattel stock. MAT had reached a high of almost $48 per share in late 2013. It spent the next five years in a steady decline. In December, MAT stock appeared to have formed a double-bottom in the $9 per share range. Before the delivered guidance, it had reached almost $18 per share.

Even after falling below the $14 per share level, we have a stock with a forward price-to-earnings (PE) exceeding 25. Also, the average long-term growth rate that analysts forecasted at 10% per year.

I do not know if Wall Street will revise that lower. However, that leaves Mattel as an equity in an old-line business with a management team that just lost the confidence of many investors. Those kinds of financials will not attract buyers under these conditions. This also makes a certain outcome for MAT more likely.

Upper Management Isn’t the Only Problem

Early last year, I stated that Mattel might have to merge with its direct peer Hasbro (NYSE:HAS) for both to compete. In an age when more kids are treating Apple (NASDAQ:AAPL) iPads or Samsung (OTCMKTS:SSNLF) tablets as toys, old-school toymakers have yet another electronic competitor.

Also, that does not consider games from the likes of Activision (NASDAQ:ATVI), EA (NASDAQ:EA), and Take-Two (NASDAQ:TTWO) which have posed a competitive threat for decades.

Moreover, with the rise of ecommerce, an individual can market their self-created board games on Amazon (NASDAQ:AMZN) or a Shopify (NYSE:SHOP) site. The Cashflow board game from Rich Dad serves as a good example.

I still think non-electronic toys have a place. However, given these conditions, today’s market may not have room for two companies like Mattel. Still, with this level of uncertainty surrounding Mattel stock, I do not think investors should buy into this dip.

The Bottom Line on Mattel Stock

The weak guidance, as well as the strange conditions by which management issued their forward-looking conditions, mean prospective buyers should stay away.

By acting in this manner, Mattel’s leadership made a challenging situation much worse. Not only did they dampen expectations, but management also divulged their bad news in a way that diminishes confidence in the management team itself.

Many will wonder whether this makes Mattel stock a buy or a buyout. I do not think we can know at this point. However, with diminished confidence, this stock can easily retest the $9 per share low. Given those possibilities, I think investors should declare “game over.”

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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