Mattel Is A Great Investment Choice For Long-Term Investors

view original post

FotoDuets/iStock via Getty Images

Mattel Inc. (NASDAQ:MAT) is a buy for those looking to win big in the long term. The market is here to stay, and so is MAT, which is one of the biggest names in the domain. Its smart managerial decisions have proven to substantially enhance value for shareholders in recent years, making it a great long-term investment.

Company Overview

Mattel Inc. is a US-based multinational toy manufacturer and a kid’s entertainment company. It is a large enterprise, with a market capitalization of $8.7 billion, as of May 2022, and owns some of the world’s most renowned toy and entertainment brands which include Barbie, American Girl, Thomas and Friends, and Polly Pocket, and many more. In addition to some of the most iconic toy brands, the company is also a popular kids’ games producer, some of which it develops under a licensing agreement from Nintendo (OTCPK:NTDOF). Mattel has an organizational setup in nearly 35 different countries, whereas its targeted market has a scope that spans over 150 countries across the globe.

The core Mattel strategy revolves around an enhancement of its intellectual property, which is the foundation of both its toy business and entertainment segment. In recent years, it has managed to achieve this through expanding upon its franchise brands, as well as enhancing sales generation through e-commerce modes. Similarly, the company places strategic importance on optimizing its operations across various levels, and throughout each business segment it operates, to enhance overall profitability. The stock price trend below for the last few years is an indicator of how MAT has fared across recent global shockwaves and disruptions, from late 2019, up until mid-2022:

Finviz

Toy and Kids’ Entertainment Industry and Opportunity for Mattel

The Toy and Kids’ entertainment industry is perpetually undergoing widescale innovation. Each successive generation of children has a preference for toys and entertainment that are radically dissimilar to those of barely a few years ago. They are also perceived as being essential for the smooth upbringing of children, allowing learning opportunities and playtime, each of which are fundamental during upbringing.

The toy market in the US alone has been valued at over $34 billion in 2021 while being projected to grow to over $46 billion by 2027. This is influenced by an organic growth of the industry at large, which in turn is impacted by birth rates as well as mean disposable incomes. Dual income households where both parents are employed typically tend to allocate higher spending towards their children’s toys and entertainment (cartoons and video games), which explains why the industry is centered primarily around markets that are economically strengthened, and these demographic features are widespread.

COVID-19 had gone on to bring a surge in demand for the products and services offered by the industry, as lockdowns meant children had more time to fill with playtime activities. This is reflected in the rate of sales change observed on a month-by-month basis in 2020 when the COVID-19 virus had reached pandemic status.

CNBC

Mattel, which is one of the largest players in the global industry, holds a core advantage, that is its mammoth scale of operations, its access to finances, as well as a wide range of established brands. Through these, it can proactively address challenges and risks from a strategic level. For instance, global inflation levels in late 2021 brought a scare across the industry, with several market participants fearing a slowdown. However, Mattel, in its recent earnings demonstrated stellar financial performance whilst successfully offsetting the adverse impacts of inflation, through a range of strategic modes. These included operational optimization, pricing of its products, and capitalizing on the scaling advantage of its large firm size. Through the company’s ‘Optimizing for Growth’ program, launched in early 2021, a total of $97 million was retained through cost savings, with an incremental figure projected to cross $250 million by 2023.

Mattel, in line with its vision of delivering high value to its shareholders, has laid out the following short-term objectives, in terms of capital allocation:

MAT Corporate Presentation 2022

Financial Performance

According to CEO Ynon Kreiz, 2021 had proven to be a “pivotal year” for Mattel Inc., given the stellar results it had managed to deliver. Where the market bears expected to see a slowdown following the demand surge during 2020, the company exceeded expectations and delivered substantial growth.

Net revenue in 2021 stood at $5.46 billion, which was a 19% rise from the 2020 figure of $4.59 billion. Similarly, net income for the year was $470 million, compared to the 2020 figure of $177 million, which reflects growth by a factor of almost 2.66 times or 95%. This is even more impressive, considering that in 2019, before the COVID-19 outbreak, Mattel reported a net loss of $218 million. This turnaround is beyond remarkable, and is displayed in the revenue growth chart below:

Macrotrends

With the ‘Optimizing for Growth’ program, Mattel was focused on cost savings to safeguard its profitability from being adversely impacted by wider inflationary pressures. It had managed to do this with relative success, limiting the increase in the cost of sales to 24% against the prior year, despite which it delivered a 95% increase in operating income. Through this, the company managed to ensure a cost reduction of $92 million, which is a major reason behind its successful financial performance. The breakdown of expected cost savings expected until 2023 under the Optimizing for Growth program is laid out below:

MAT Annual Report FY21

Based on its financial performance, there is a clear indication that MAT is a high-growth stock, which is maximizing shareholder returns through smart decisions undertaken at a strategic level, making the stock a highly sustainable investment option.

In its most recent quarterly report for Q1 2022, this momentum had clearly been shown to persist, with the company continuing its robust growth trend, whilst surpassing expectations laid out by analysts. This denoted the eighth consecutive quarter of Mattel surpassing the Zacks consensus estimate, indicating the strength of its financial performance, and persistence of its growth trend.

In the prior year’s first quarter, Mattel reported a loss of 10 cents per share, which the Zacks consensus estimate expected to be limited to 5 cents per share for the first quarter of 2022. Mattel, however, substantially surpassed these expectations by delivering an EPS of 8 cents per share. This is impressive given that, based on the cyclical nature of the Mattel business, the first quarter has not been the strongest. Similarly, net sales for the quarter rose by almost 20% on a year-on-year basis, hitting the $1,041 million mark. This too was beyond the Zacks consensus estimate for the quarter of $932 million.

According to the CEO, this stellar performance was in large part due to the company’s hold over its supply chain and logistical systems. This along with its stakeholder management with its retail partners has ensured that demand was sufficiently met in both its North American and international business segments.

I do however believe that this high growth rate cannot be assumed to persist perpetually, as the benefits of the optimization program by the company will eventually hit a critical point beyond which further cost savings can no longer be achieved. The present growth trajectory, which is significantly remarkable would likely continue for another few years, leading to value growth, as coupled with the recovery of the company’s financial performance. This makes the present the best time for investors to buy this stock before its growth slope flattens out. Furthermore, I do also believe that the company’s strategic relationships with a number of industrial players as well as its market position the stock to capture growth opportunities as the industry continues to evolve and transform itself with emerging technologies. An investment in MAT would entail a certain exposure to a present growth spurt, along with potential exposure to long-term steady growth.

Valuation

Ticker

Company

Market Cap

P/E

Forward P/E

EPS growth this year

Institutional Ownership

Return on Equity

Price

(BC)

Brunswick Corporation

5.84B

9.96

6.74

61.50%

95.50%

32.70%

77.22

(CUK)

Carnival Corporation & plc

19.99B

105.27

35.90%

15.40%

-68.30%

15.83

(ELY)

Callaway Golf Company

4.17B

9.02

25.33

235.10%

77.80%

8.70%

22.27

(HAS)

Hasbro, Inc.

12.61B

29.56

15.06

109.10%

79.20%

12.50%

89.67

MAT

Mattel, Inc.

8.70B

8.37

12.9

614.00%

99.40%

83.00%

24.71

(PLNT)

Planet Fitness, Inc.

7.44B

156.92

37.31

373.10%

-6.40%

80.92

(POOL)

Pool Corporation

16.76B

22.43

20.45

79.10%

96.10%

71.10%

412.08

(PTON)

Peloton Interactive, Inc.

6.12B

-98.50%

90.80%

-59.70%

18.73

(SEAS)

SeaWorld Entertainment, Inc.

5.20B

20.98

14.86

180.70%

-541.30%

68.34

(YETI)

YETI Holdings, Inc.

4.44B

20.39

14.21

35.20%

99.00%

51.10%

51.03

The table above highlights crucial valuation metrics of leisure stocks that similarly have a large scale of operations to MAT and have over $4 billion in market capitalization.

In the most widely used metric, the P/E ratio, MAT fares as the best investment option, given the low cost associated with its earnings. With a P/E figure of 8.37, MAT is presently a stock that is potentially undervalued to a significant degree, and one that has the most efficient earnings for its shareholders. To further emphasize the degree to which MAT is an efficient investment from a shareholder’s point of view, the stock has a remarkable ROI of 83%, which is far above that of any other comparable stock. For those seeking profitability, MAT is the best option in the leisure industry.

Similarly, its growth potential is reinforced even on a forward-looking approach, as the stock also has the lowest forward P/E ratio, of 12.9, effectively making it the stock with the highest growth potential. The MAT growth potential can further be glimpsed by taking a look at its annual EPS growth which is a whopping 614%, far above every comparable stock on the list. I believe this growth to be sustainable, given that it is not based on a one-off financial event, and therefore would not be perceived as being an anomaly. In fact, the EPS growth chart for the stock below indicates a gradually growing EPS on a quarterly basis, with a forward-moving momentum:

Macrotrends

I believe this growth spurt will likely increase at a decreasing rate, and eventually flatten out upon achieving its optimization efficiencies and capturing significant portions of market share. In my opinion, the current growth trends associated with MAT may not perpetually continue, given the nature of its market. Therefore, the best time to buy MAT in order to cash in on its remarkable growth spurt is now. This may slow down in a few years unless the company introduces a radically different product concept in the future. With its strategic partnerships as well as its strong financial position, MAT has the potential to embark on such a strategic initiative to maintain its growth momentum, through potentially delving into dynamic areas such as the metaverse, which could transform the children’s entertainment industry.

The stock also has the highest level of institutional ownership, which is 99.4%, further demonstrating the low risk and stable prospects it holds.

On this basis, it is apparent that the stock may undertake a rise in the future, delivering its holders capital appreciation. I believe this to be the case given that each of its metrics points toward a substantial degree of undervaluation relative to the industry. Hence, the market will eventually correct its price to a mark closer to the stock’s intrinsic value.

Each of these metrics points to the degree that MAT is a highly undervalued stock, thus confirming my view that this stock is a clear buy.

This stance was reinforced as recently as late February 2022, when Stifel upgraded MAT from hold to buy amid hopes that the company is ready to meet or exceed its goals through 2023. In doing so, analysts at Stifel set the target price of the stock at $33 which suggests an impressive upside in the coming months.

Analyst Drew Crum said:

The basis for our upgrade reflects increasing confidence around the company’s ability to meet or exceed its intermediate-term goals (through ’23). This is underpinned by several initiatives to drive sales growth, while leverage/mix/cost savings should yield further margin gains and improve cash flow generation. And if accurate with our assumptions, the financial profile of the business would resemble 2012-’13, a period in which MAT traded at $40+/share, suggesting meaningful potential upside from current levels.

Further updates relating to the company’s forward-looking initiatives have further strengthened its valuation profile, with the most recent being Mattel’s expansion towards the movies sector. In late April 2022, the company announced that the Bad Robot motion picture by JJ Abrams will see a live-action version being released based on the Hot Wheels toy brand. The news is taken favorably as it will help the company monetize its intellectual property from entertainment. The Hot Wheels movie is not the only project in the pipeline based on the well-known brand. Among the projects announced so far are the movie based on Barbie and starring Margot Robbie, a movie about Masters of the Universe, and others based on UNO, View Master, Thomas & Friends and other IPs.

Risks

Despite the company’s large scale of operations, and its access to financing, the toy and children’s entertainment industries are extremely competitive, and hold significantly low barriers to entry. Given the dynamic and evolving nature of the children’s entertainment market, it can be very difficult for the company to prevent disruptive innovation.

The company has highlighted in its most recent annual report that this is a serious risk, and the company is faced with the potential danger of new entrants building upon the success of concepts launched by Mattel Inc. For this reason, Mattel invests a high degree in the safeguarding of its intellectual property, through licensing and renewals. As part of the Mattel strategy, high potential concepts in the market are acquired, based on which royalty incomes are earned by the company.

Moreover, as I have stated above, the present MAT growth is likely to eventually flatten out, as it is primarily being driven by a post-COVID market recovery, as well as cost optimizations. The toy and kids’ entertainment market is mature and unlikely to grow to a substantial degree. This is because it is tied to demographic factors such as birth rates, and economic variables such as disposable income. This emphasizes the need for the company to undertake radical innovation, which would allow for it to launch new brands that have not yet been launched into its existing market. This could potentially use emerging technological domains such as the metaverse.

Conclusion

Mattel Inc. is positioned in a high-growth market, with an industry that is constantly evolving and undertaking dynamic shifts. Given the nature of the products and services provided, targeted to young children, the industry will never potentially become obsolete, therefore is a highly sustainable domain for investment.

MAT is a go-to investment option for those looking to capture opportunity in this high potential industry, as no comparable stock is undervalued. This is in part due to its low price, combined with exceptional earnings, growth rates, and ROI. Its substantial degree of institutional ownership further reinforces this view, of why MAT is a buy.