As earnings season continues, Mattel (NASDAQ:MAT) is likely to be volatile in the coming days. The California-based toy maker is expected to release second-quarter earnings on July 23, after the close of the market. So far in the year, MAT stock is down 17%, hovering at $11.24.
Regular InvestorPlace readers are likely to be familiar with Mattel’s brands. The leading toy company’s globally known titles include Barbie, Hot Wheels, Fisher-Price, American Girl, Thomas & Friends, UNO and MEGA. It also licenses other popular intellectual properties in partnership with global entertainment companies.
In 2019, these brands were among the top-sellers worldwide. Yet over the past decade, weak sales and high costs have weighed on the firms’ performance and the price of MAT stock.
Therefore today, I’ll discuss what investors may expect from one of the top toy makers globally in the rest of the year. Long-term investors may consider committing capital to Mattel stock if the share price goes down toward $10 or below.
What to Expect From Q2 Earnings
When the group reported Q1 results, net sales came at $594 million, down 14% from the prior year. The adjusted operating loss was $133 million, compared to a prior-year loss of $97 million. Cash flows used for operating activities was $174 million, marking an improvement of $19 million.
CEO Ynon Kreiz said “We remain focused on transforming Mattel into an IP-driven, high-performing toy company and creating long-term shareholder value. … We are planning for increased demand for our products in expectation of a much-improved second half and holiday season.”
Mattel owns of one of the strongest catalogs of children’s and family entertainment franchises in the world. Yet the company’s performance has been lagging for a number of years. As highlighted in the words of the CEO, Mattel has been working hard to transform itself.
In a December 2019 interview, Mr. Kreiz told CNBC host Jim Cramer that his vision for the company involved not just toys, but also movies, television, games, music and live events. He would like to achieve consistent top-line growth of 1%-2.5% per year. However, the health and economic effects of the pandemic are likely delay the turnaround. In fact, management withdrew previous 2020 guidance due to uncertainty related to the novel coronavirus.
The company has also been working on its cost structure. In Q1, gross margins came in at 43%, a sizable improvement of 820 points. Investors are pleased with how profit margins have been improving. However, without sales growth, improved margins will not be enough to turn the company around.
Therefore when the group reports earnings on Thursday, Wall Street would like to get a better appreciation of how the company is planning for the holiday season that is upon us in a few months.
Price Action of Mattel Stock
Long-term price action in Mattel stock is a testament to issues faced by the group. In May 2013, MAT stock hit an all-time high of $47.82. Since then the price move has been a clear sequence of lower highs and lower lows.
Mattel stock started 2020 around $13.50 and on Jan. 29, saw a 52-week high of $14.83. Then as broader markets plunged in late March, it hit a multi-decade low of $6.53. Since then, it is up over 70%. Put another way, if you were brave enough to invest $1,000 in MAT stock in early spring, you’d now have around $1,700.
Given the recent run-up in price, there is likely to be increased volatility and possible profit-taking in the coming days. If you are an investor with paper profits, you may want to take some money off the table.
Alternatively, if you currently own MAT stock, you may also consider initiating a covered call position with approximately a four-week time horizon — so Aug 21 expiry. Such a covered call position would enable to you to participate in a potential up move and also offer you some downside protection.
If you do not currently own MAT shares, you may want to analyze the results before committing new capital into the business. A move toward $10 or below could make the toy maker a potentially good long-term investment.
The Bottom Line on Mattel Stock
Whether the turnaround at Mattel can successfully be achieved in the coming quarters is hard to know. Given the economic uncertainties due to Covid-19, consumers may not be willing to spend much on toys this holiday season.
However, the company has several top brands that can potentially be energized to cater to consumers’ tastes and wants. Meanwhile, it may become a takeover candidate. In 2017, Hasbro (NASDAQ:HAS) wanted to buy Mattel but the deal never materialized. At the time, MAT stock was around $17. If the shares stay depressed in the coming quarters, Hasbro or another group may set its eyes on the company.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.