(MAT) (Mattel)

Overview of the Company - Mattel is a children's entertainment company that makes toys and consumer products. Its partners include Disney, NBCUniversal, WWE, Microsoft, Nickelodeon, Warner Bros, and Sanrio. Heard of Hot Wheels, Fisher Price, Barbie, Matchbox or American Girl toys? Well, Mattel makes these products and many more. Through its partnerships, they also manufacture toys from different franchises like Toy Story, Jurassic World and Star Wars. They have a little over a $7 billion market cap and are headquartered in Los Angeles.

Fundamental Analysis - Mattel is an interesting story. The death of retail stores where a lot of their products are sold, most namely, Toys R Us should mean certain death for this manufacturer - right?? That may not be the case. In fact, during the Covid lockdown with retailers either closed or restricted to some extent, Mattel had its best quarter since June 2014! Q3 of 2020 was its best quarter in over 5 years! It boasted an EPS of $0.84 for the quarter, compared to a consensus estimate of $0.38! If Mattel is able to plow through the pandemic making close to record quarters in terms of earnings - I think that this toy manufacturer can be a potential unknown winner in the coming year.

How (MAT) Stacks Up to Competitors - We will be comparing Mattel with fellow toy manufacturer, Hasbro (HAS). Heard of Monopoly, Play-Doh, My Little Pony, or Nerf? Well Hasbro owns those brands. Hasbro is quite larger than MAT with a $12 billion dollar market cap. Next, is a somewhat related company that is in the manufacturing sector but they aren't necessarily making toys. Newell (NWL) owns the Sunbeam, Rubberaide, Elmers, Sharpie and Crockpot brands. While not necessarily toys, they manufacture household name brand goods and have a similar market cap at over $9 billion. Mattel has the best profitability and return on equity, while NWL and HAS fall behind at similar levels. NWL and MAT have modest revenue increases, but EPS numbers have more than doubled year over year for the current quarter. Debt to cash is disturbing because all three companies have a lot of debt relative to their cash reserves. Newell trades a little over twice book value, while HAS trades over four times and Mattel over 7. While these are profitable companies, it is clear they have a lot of infrastructure and debt tying them down. Interestingly, HAS and NWL have a 3% and 4% dividend yield respectively while MAT does not offer a dividend.

Bull Case - With a huge beat over the pandemic and the company able to surprise streat estimates regardless of retailers closing, I think MAT has shown that it is a resilient company. Despite supply chain issues and inflation worries, Mattel was able to post revenue and earnings beats for 6 consecutive quarters. Mattel has proven that it is a strong company backed by brand names that will continue to increase earnings for the company.

Bear Case - With fears of inflation coming, and supply chain issues, I believe the question is - Does Mattel have the pricing power to be able to still retain customers even if prices rise by a substantial amount. I don't believe so. I believe that the consumer will grow tired of price hikes and wages staying relatively the same. Consumer cyclical and leisure products like these will warrant a skip during the next trip to the store. The American consumer, put simply, will not be doing well enough to drive earnings to sizable levels for this company in the years to come. MAT is a defensive company making brand name toys, but they aren't 100% necessary and there are too many issues with the economy to warrant a pruches of their stock.

Valuation and My Price Target - To be honest, I do not see EPS numbers increasing over the next year. I believe that $2.40 is a good estimate for their EPS and frankly, I don't believe that they will prove why they need to trade at a more expensive valuation. I think inflation issues and supply chain restraints will cause MAT to raise prices. Consumers may be able to absorb these price hikes but there will be some that will skip the pack of Hot Wheels this holiday season. I believe a reasonable one year price target is $21.50.

The Verdict - BUY HOLD SELL

There is no doubt about it, Mattel is an interesting company. They are a vital one for many children's childhoods. I just don't think they are a great place to put money. With children moving to more technology and streaming for entertainment, and potential rising costs, consumers will likely move away from the physical toys in the year to come. Mattel isn't a cheap company either, with massive debt and the fact that their business model is tied to how the consumer is doing, I think that there is too much risk in this stock to warrant its current price. With a price target of $21.50 this indicates a 5% return. Additionally, with no dividend offered, I think there are better places to put your money. Currently, MAT is a SELL.

*all data provided by yahoo finance and nasdaq.com and marketbeat.com