In this article, let's take a look at Mattel Inc. (MAT, Financial), a $11.44 billion market cap company, which is a large toy company, and successful brands and products include Barbie dolls, Fisher-Price toys, American Girl dolls and books and Hot Wheels.
Big company
The company is the largest one in the toy industry. Last year, it had approximately a 20% market share in the U.S. toy industry.
The U.S. toy market is mature, but internationally the firm can have a successful growth, in countries where income is improving. We are thinking of Brazil, Russia, India or China. Revenues from the international segment provided 46% of consolidated gross sales in 2013. In the international segment, the geographic breakdown was as follows: Europe, 55% of 2013 sales; Latin America, 31%; Asia Pacific, 14%.
Growth strategy
We believe the principal growth strategy is to build the branding through innovative but popular toys. Licensing arrangements or strategic partnerships are developed in order to extend its portfolio of brands into new areas. Further, acquisition strategies, like the one with Mega Brands, and expansion into new franchises should help boost future revenues.
Changing trends
The toy industry is changing, because children have been moving away from traditional toys at younger ages. They are using more-sophisticated products, so the target market for Mattel is variable. The company focuses on introducing new products to compete, incorporating digital properties.
New competition
Toy companies also have new competitors, the digital toy manufacturers. They face competition of entertainment offerings, such as video games and consumer electronic products.
Great cash
The company launched a program to reduce costs in 2008, and these increase cash flows. This should help to increase dividend payouts and share buybacks
Revenues, margins and profitability
Looking at profitability, revenues declined by 9.15% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.08 vs $0.21).
The gross profit margin for the company is considered rather high, at 51.04%, but it has decreased from the same period of the previous year. The net profit margin of 2.66% is similar to the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| MAT | Mattel Inc. | 26.57 |
| RGR | Sturm Ruger & Company | 58.71 |
| PII | Polaris Industries Inc. | 55.74 |
| HAS | Hasbro Inc. | 20.88 |
| ELY | Callaway Golf Co | -3.59 |
| Â | Industry Median | 7.45 |
The company has a current ROE of 26.57% which is higher than the industry median. Also, it is higher than the one exhibit by Hasbro (HAS, Financial) and Callaway Golf (ELY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Sturm Ruger & Company (RGR, Financial) and Polaris Industries Inc. (PII, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 14.6x, trading at a discount compared to an average of 29.1x for the industry. To use another metric, its price-to-book ratio of 3.91x indicates a premium versus the industry average of 2.34x while the price-to-sales ratio of 1.85x is above the industry average of 1.71x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $23.370, which represents a 18.5% compound annual growth rate (CAGR).
Final comment
As outlined in the article, we expect the firm will succeed with its growth opportunities and so it can stay in the top of total shareholder returns in the long run.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Brian Rogers (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
