MAT - Mattel: A Cautious Approach Amid Uncertain Growth

2024-01-16 10:06:43 ET

Summary

• Mattel benefited from the recent Barbie craze, surpassing EPS expectations the last two quarters.
• Cautious FY 2023 outlook, slow holiday sales, and a lack of 2024 growth drivers raise concerns.
• Analysts' revisions and industry competition suggest a "wait and see" hold approach, exploring alternatives.

Mattel, Inc. ( MAT ), the world’s fourth-largest toy manufacturer by revenue, has been riding the wave of the recent Barbie craze. This has helped it exceed EPS expectations and boost its stock price. However, a cautious outlook for FY 2023 was expressed in Q3 2023 , and industry news suggests a slowdown in holiday sales . Additionally, industry peers are undertaking significant cost-cutting measures. Analysts have also lowered their forecasts due to the absence of solid growth drivers for 2024, once the Barbie effect subsides. There are more appealing alternatives within the toy industry currently, with better price-to-earnings ratios and growth drivers. Hence, I recommend adopting a “wait and see” approach and maintaining a hold rating on the stock until Mattel provides a clearer picture of its growth prospects for the upcoming year.

Company highlights

Mattel has seen a boost in its performance, largely due to the success of the Barbie movie, which exceeded expectations. This success has led to an expansion of the Barbie product line. However, this growth was somewhat offset by a general decline in the toy industry’s demand. Despite the success of its power brands, Barbie and Hot Wheels, Mattel has seen a year-on-year decline in two of its four categories.

The company’s business is highly seasonal, with a significant reliance on holiday season sales. While the results for this period are yet to be released, industry trends suggest a potential weakness in sales. This is further evidenced by c ost-cutting measures , such as job cuts, announced by industry peers like Hasbro.

The company’s guidance for FY 2023 also falls short of its FY 2022 EPS achievements.

Looking ahead to 2024, Mattel plans to replicate its movie-based strategy with other popular brands. It has announced new collections inspired by the Barbie movie across its portfolio, including UNO, Hot Wheels, Fisher-Price, MEGA, and Barbie. The company is also exploring digital gaming and NFTs to tap into the growing digital market. With a reported $150 million marketing budget for the Barbie movie demonstrating the effectiveness of such campaigns, Mattel is planning new marketing strategies. These initiatives could potentially drive growth in 2024.

Financials

Mattel’s top-line TTM was $5.22 billion, which represented a decrease of 10.39% YoY. However, the revenue for Q3 2023 was $1.92 billion, showing a 9.28% increase YoY. Looking at the past five years, Mattel’s annual revenue showed a mixed trend. In 2022, the annual revenue was $5.43 billion, a slight decrease of 0.42% from 2021. The year 2021 saw a significant increase of 18.95% in revenue from 2020, reaching $5.46 billion. The revenue for 2020 was $4.59 billion, a modest increase of 1.86% from 2019. Despite some fluctuations, Mattel has managed to maintain a steady revenue stream over the past five years.

As of Q3 2023, Mattel’s TTM net income was $83.2 million. This represents a significant decrease of 86.22% compared to the previous year. Over the past five years, Mattel’s net income has seen some fluctuations. In 2022, the net income was $393.9 million, a decrease of 56.38% from 2021. In 2021, the net income was $903 million, a substantial increase of 630.7% from 2020. In 2020, the net income was $123.6 million.

As of Q3 2023, Mattel’s TTM levered free cash flow was $462.3 million. This figure has seen some fluctuations over the past five years, but we can see a significant increase from FY2022. Levered free cash flow is a crucial metric for potential investors as it indicates the amount of cash a company has available after paying its financial obligations. A positive and increasing levered free cash flow is generally a good sign for potential investors, indicating that a company can reinvest in the business, pay off debts and reward shareholders. In Q3 2023, the company repaid $250 million of debt in the fourth quarter of last year. And in the first nine months of 2023, repurchased $110 million of shares.

If we look at the company's balance sheet, we can see that total cash increased to $456 million compared to $349 million in the prior year. Furthermore, the company reduced its debt to $2.329 billion, which reflects the debt payment of $250 million. The company has lowered its inventory from $1.84 billion to $791 million in the last year. We can see that the company is sufficiently liquid to cover its short-term liabilities with a quick ratio of 1.55.

Valuation

When we look at Mattel in comparison to its peers in the toy industry, such as LEGO, Bandai Namco ( NCBDF ), Hasbro ( HAS ), and JAKKS Pacific ( JAKK ), Mattel ranks as the fourth largest company based on FY2022 revenue. The success of the Barbie movie has helped offset underperforming categories, contributing to its revenue growth.

However, the toy industry is fiercely competitive, and clear growth strategies are crucial for maintaining a competitive edge. Mattel’s lack of significant growth drivers could pose a challenge for investors seeking high-growth opportunities. This, combined with the intense competition in the toy industry, makes it difficult to believe that the company can maintain its Barbie growth momentum. While Mattel has demonstrated stability, the potential for substantial growth seems limited at present.

Notably, Mattel’s FWD price-to-earnings ratio of 14.39 is more attractive than that of Hasbro, suggesting better value. However, the small-cap JAKKS Pacific appears to be undervalued at 7.00.

While the company has beaten EPS expectations in the last two quarters, the market sentiment towards the stock has decreased since its cautious outlook for FY2023. Even after a colossal Barbie year, the company is unlikely to top its FY2022 EPS results.

Final thoughts

Mattel has experienced an increase in revenue compared to the previous year in Q3 2023 due to the recent Barbie craze. However, the cautious outlook for FY 2023, combined with sluggish holiday sales across the industry and a lack of clear growth drivers for 2024, raises concerns. While the company's strategy to replicate success through movies and expand into digital markets is promising, analysts' downward revisions and the competitive landscape make it difficult to be overly optimistic about the stock. Additionally, there are more attractive alternatives within the toy industry. Therefore, my recommendation is to take a "wait and see" approach and to hold onto the stock until we get a better idea of the company's outlook for 2024. The company will announce its 2024 outlook and Q4 2023 on the earnings call on February 7.

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