To no one’s surprise, toymaker Mattel (NASDAQ:MAT) was one of the worst-hit names amid the novel coronavirus-fueled market fallout. Even after jumping up from this year’s bottom, MAT stock has dropped more than 38% since January’s opening price.
And while some contrarians have suggested that this bearish phase is a perfect opportunity to pick up stocks on the cheap, Mattel isn’t a viable candidate.
Let’s get the low-hanging fruit out of the way. Recently, the Department of Labor disclosed that 3.8 million workers filed for unemployment benefits in the week ending April 25. According to CNN, over the past six weeks, those who have filed jobless claims number 30.3 million. On paper, this translates to an unemployment rate of nearly 19%.
However, when you factor in that millions have attempted to reach their state unemployment offices but to no avail, the recent tally understates the true problem. In this staggeringly devastating environment, most families will eschew discretionary purchases in favor of survival. Therefore, MAT stock “deserves” to drop.
But back during the Great Recession, Stevan Buxbaum, then an analyst with consulting firm Buxbaum Group, stated that the toy industry is recession-resistant. Buxbaum reasoned that, “You just can’t explain to a 4-year-old that he won’t get the toy he wants because there’s a recession.” Therefore, you can expect parents to dig deep to spare their children pain.
Initially, you’d think that bodes well for MAT stock, along with toy-retailing powerhouses like Target (NYSE:TGT) and Walmart (NYSE:WMT). But when it comes to toy manufacturing specifically, I disagree. If you look at what’s going on in the ground, many families have no choice but to disappoint their children.
Demographics Tells the Story for MAT Stock
I’m not going to entirely throw out Buxbaum’s analysis. But rather than suggest that Mattel or similar companies are recession-resistant, my opinion is that the toy industry is a forward economic indicator.
When you stack the U.S. birth rate against the yearly average MAT stock price, you quickly realize that investor sentiment toward Mattel consistently overreaches against demographic realities. For instance, during the 1990s, the birth rate was very high compared to what it is today. However, the rate was also declining while MAT was increasing (dramatically) in value.
By the late 1990s, MAT stock could no longer move against its fundamentals. Quickly, shares tumbled ahead of the tech bubble bursting and the 9/11 terrorist attack.
However, economic and consumer sentiment improved during much of the 2000s. Subsequently, the U.S. birth rate also saw a modest uptick, inspiring bullishness toward Mattel stock. But while the 2008 market crash and the Great Recession stopped the baby-making, MAT continued its remarkable ascent.
Again, as what happened during the late 1990s, trading sentiment could no longer justify running counter to the fundamentals. In 2013, when MAT stock peaked in annual average price terms, the U.S. birth rate had at that time hit an all-time low in modern history.
Moreover, shares continued to come down as the birth rate moved slightly higher before plummeting again. Last year, the birth rate was 11.98 births per 1,000 people. This year, experts predict that the rate will hit 11.99.
At time of writing, Mattel stock is trading under $9. Initially, you might think this is a great opportunity – shares are aligned with their fundamentals. But when MAT was this low (in the early 2000s), the birth rate was much higher.
Mattel Is a Sell
If we assume that the birth rate over the next few years averages around 12 births per 1,000 people, we will see a decline around 15% from levels recorded in the early 2000s. During that time, the average price of MAT stock was approximately $9.82, not too far off from where it is now.
If you’re holding a significant amount of shares, that should worry you. Essentially, you’re gambling against math. While the markets can stay irrational for an unexpected time period, eventually, they do trade back to their fundamentals.
More worryingly, demographic experts forecast that over the next several years, the birth rate will decline. So, unless Mattel is in the business of making high-profit-margin toys, the situation does not look good.
If the breakdown of U.S. toy sales is any indication, Americans are purchasing less of nearly every toy category, especially the expensive (read high margin) toys.
On top of that, we have the coronavirus. I’m sorry, but there are now too many headwinds to make a positive recommendation.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.