Why Mattel's Stock Price Could Beat the S&P 500
- By Robert Stephens, CFA
Mattel (MAT)'s stock price may get a boost in the near future from its decision to capitalize on its range of entertainment franchises. The company is seeking to move towards a capital-light business model through a series of partnerships as it aims to maximize revenue opportunities within its intellectual property portfolio.
Matel is on track to deliver cost reductions. Its position within the global toy market has improved in recent months. Although performance in China has disappointed, it is putting in place a new strategy in Europe that could offset this.
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The intrinsic value of MAT
Having fallen 12% in the last year versus a 1% rise for the S&P 500, the stock seems to have investment potential.
Strategy
Matel is leveraging its catalog of family and kids' entertainment franchises and aiming to commercialize a diverse portfolio that includes a range of intellectual property. It plans to capitalize on the value within its intellectual property portfolio by expanding into areas such as digital gaming, consumer products, music offerings, as well as film and television. And, it is delivering partnerships with specialists in a variety of industries as it aims to adopt a capital-light business model, which will not create a significant amount of financial risk.
In order to deliver on its commercialization strategy, the company has recruited a new management team alongside the creation of Mattel Films. It has appointed Robbie Brennet as executive producer, and potential partners have shown in this venture. This is in addition to the creation of a global franchise management organization that is aiming to complement its core toy business through moving into new verticals that have minimum capital expenditure requirements.
Improving performance
The company is aiming to achieve $650 million in run rate savings exiting fiscal year 2019. Its Structural Simplification cost savings program has so far cost $104 million in severance and restructuring costs since the start of the fiscal year. It is on track to deliver savings in line with its target and was able to record $120 million in savings during the most recent quarter. This takes its total savings in the current fiscal year to $160 million.
Its move towards a capital-light business model is expected to lead to further savings, with plans to make major changes to its manufacturing footprint and supply chain. Further product and marketing innovation is expected, which could further cut costs.
Mattel's most recent quarter saw its strongest growth rate in the U.S. since the final quarter of 2015. This helped it to recapture its position as the No. 1 toy company globally in the four months through September 2018. With the toy industry forecast to grow on a global basis from 2018 through 2022, the company could be in a strong position to benefit.
Potential threat
Amazon (AMZN)'s decision to move into the generic toys marketplace could pose a threat to Mattel's financial outlook. Amazon has recently begun to advertise its Amazon Basics brand private label toys for toddlers and kids as it seeks to compete with more established toymakers. The company's recent performance in China has also been disappointing. In the most recent quarter, it accounted for all of the 11% decline in international sales. It is seeing a slowdown in China due to a softening retail market. This is expected to continue over the short run.
Although Amazon's move into generic toys could threaten Mattel's future, it is currently only advertising a small range of items that are not yet available for shipping. It could take a number of months for the company to ramp up sales in this area, while Mattel may be able to improve its efficiency and business model during this time.
While growth in China has disappointed, there is potential for expansion elsewhere. In Europe, the company is implementing a growth plan where is it seeking to improve its e-commerce capabilities and increase its exposure to value retailers. Given the size of the market and the strength of the company's brands, this could offset potential weakness in China.
Outlook
Further progress in reducing costs could boost Mattel's financial performance. The company may benefit from continued growth in the wider toy industry as a result of its improving market position. Expansion into Europe through a refreshed strategy could act as a further catalyst on its stock price.
Leveraging its wide range of intellectual property could provide growth in new verticals. A move to a capital-light business model may reduce financial risk and create a more flexible company. Although Amazon's move into generic toys is a potential threat, the strategy being pursued by Mattel could allow it to deliver a stock price turnaround after underperforming the S&P 500 in the last year.
Read more here:
Mattel Surges on Strong Operating Income Growth, Barbie Sales
John Rogers' Ariel Fund 2nd Quarter Commentary
Mattel Tries to Recast Its Misfit Image
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Signs with MAT. Click here to check it out.
The intrinsic value of MAT
