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Yamil Berard
Yamil Berard
Articles (192) 

Mattel Tries to Recast Its Misfit Image

Gurus piling on shares have not abandoned the old-fashioned toymaker

May 11, 2018 | About:

Sometimes, it takes a pack of the world’s savviest investors to recognize the intrinsic value of a company that sells products that might be better off on the island of misfit toys.

Let’s face it, Mattel’s (NASDAQ:MAT) Barbie and Ken don’t have the same allure with today’s generation of girls and boys. As a result, the toymaker may seem like a bad investment.

On the other hand, Mattel just might be the right pick for investors who love a good bargain, hold stocks for the long term and consider the broader picture. A growing number of guru investors have made bets over two consecutive quarters.

Gurus who initiated long positions in Mattel over the last six months include Pioneer Investments (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Dodge & Cox and Tom Russo (Trades, Portfolio). Mason Hawkins (TradesPortfolio)' Southeastern Asset Management holds a 5.18% stake in Mattel in a $8 billion portfolio of 31 stocks, expanding the stake in the final months of the year. Others who piled on shares were  PRIMECAP Management (TradesPortfolio), Jerome Dodson (Trades, Portfolio), John Rogers (Trades, Portfolio) and the T. Rowe Price Equity Income Fund.

In the first quarter, Dodge & Cox expanded its holding by 37% to 35.7 million shares in a portfolio of 178 stocks valued at $129 billion. Around the same time, Tom Gayner (TradesPortfolio) established a new position, buying 99,000 shares. Gayner had sold out two years ago, but was drawn back.

Guru interest

After the Toys 'R' Us bankruptcy, many on Wall Street had assumed the Southern California-based toymaker was a goner. The mega-retailer had been prime carrier for Mattel, and losing the platform was going to sink revenues further.

For years, the company has limped along with battered shares and dismal sales. Its stock has fallen more than 60% in the last five years. More than 27% of its float is shorted.

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But a surge of springtime optimism has been helpful. In April, shares surged after the company got a pivotal upgrade from an analyst who predicted the market would be kinder to its stock. The analyst said any stock slippage was unlikely, as shares were already trading at $14 a pop, a price that indicated its high-risk component. The company’s stock price is still somewhat protected by the quality of its intellectual property, the analyst wrote.

Since April 1, Mattel’s stock is up 13%. On Friday, it stood just under $15 a share, up more than 2%. Its 52-week range is $12.21 to $23 a share. The one-day range is $14.33 to $15.11.

There are still unabated rumors the company might merge with a competitor like Hasbro (NASDAQ:HAS).

Another fairly new development: A new CEO.

First-quarter results

The company released earnings in late April.

It reported net sales of $708 million in the first quarter, compared to $735.6 million in the same quarter a year ago. It also reported a drop in gross sales to $800 million from $814 million a year ago.

Wall Street was encouraged, however, by a surge in sales of its power brands, like Barbie and Hot Wheels. Barbie sales increased to $152.7 million compared to $123.4 million in the prior-year quarter. That’s a jump of 24%. Hot Wheels grew to $145 million from $126 million in the prior-year quarter. Sales of American Girl, Fisher-Price and Thomas and Friends continued to slump.

Newly minted CEO Ynon Kriez reacted to the first-quarter results with an emphasis on the double-digit growth of Barbie and Hot Wheels.

Krietz replaced Margo Georgiadis after continued weak sales.

Kriez had been a director on Mattel’s board since June 2017. Before coming to Mattel, he was CEO of a television and digital production company and CEO of video network Maker Studios Inc.

As part of a transformation plan, Kriez is implementing cost-cutting and brand development efforts. On April 26, the company also reported the Toys 'R' Us liquidation had a $87 million operating income impact, including a $30 million sales reversal.

Kriez’s first day on the job as CEO was April 26, when earnings were made public.

It’s not pretty

The road back to profitability won’t be easy.

Mattel has a price-book ratio of 5.18, lower than the overwhelming majority of its peers. Its price-sales ratio is 1.04, or 73% higher than its peers. The company has a dividend yield of 3.57%.

The return on equity ratio sank to -57.50% in the final months of the year after posting a gain of 12.56% in December 2016.

Its return on assets also dove to -16.55% versus 3.20% a year prior.

Gross margins have been falling for several years. In December 2017, the gross margin stood at 37%, compared to more than 50% in 2012.

Revenues stood at $4.8 billion in December 2017, compared to $5.4 billion in the prior-year quarter. Revenue reached $6.3 billion in 2011. Gross profits took a dive to $1.8 billion in 2017, compared to $3 billion in 2012. It reported net income of -$1 billion in the final months of the year. Long-term debt is $2.87 billion. Free cash flow is -$325 million.

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GuruFocus ranks it 4 out of 10 in profitability and growth, and in financial strength. It has issued several severe warnings signs, reflecting years of declining revenues and profit margins. The company also has a Piotroski-F Score of 3, which indicates poor business operations. Its market cap stands at $5 billion.


Rating: 5.0/5 (2 votes)

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