David McNew
Investment Thesis
Mattel, Inc. (NASDAQ:MAT) delivered a great quarter and re-affirmed its guidance for FY22 despite a challenging environment. In this article, I highlight how a combination of a strong, existing product line-up and an even stronger product pipeline make it well-positioned for sustainable long-term growth.
Barbie and Hot Wheels Continue to Dazzle
Q2 Revenue for MAT came in at $1.24 billion, up 20% YoY, comfortably beating analyst estimates by nearly $138 million. Adjusted EPS came in at $0.18, beating estimates by $0.12. This strong performance can be primarily attributed to the strength of the company’s two iconic products: Barbie and Hot Wheels.
The performance of Hot Wheels specifically was pleasantly surprising, as it posted a 31% YoY growth. With a 33% growth YTD, this product category is on track for a fifth consecutive year of growth thanks to the continued momentum seen in its Monster Trucks and the expanded Direct-to-Consumer offerings, which have been responsible for increased sales among its adult fans. Mattel has also released a series of Hot Wheels NFTs and is expected to launch its latest NFT collection, the Garage Series III very soon.
The Barbie category also performed reasonably well, and the sales of this segment have already grown 9% till date. This is on top of the double-digit YoY growth in sales registered by this category in the last 2 years. Given that the Barbie movie, starring Margot Robbie and Ryan Gosling, is slated to hit the screens next summer, expect sales to pick up even more. The movie has already created so much buzz that I believe that this category is going to be a strong growth driver for the company in FY23. As such, I think investors have to take the management’s announcement that they have not factored in the additional sales from the movie buzz with a pinch of salt.
Overall, Mattel’s existing line of products have done extremely well and, based on current evidence, they are set to continue to do so for the foreseeable future.
SpaceX & Jurassic World: Mattel’s Lineup Gets a Boost from the Past and the Future
Not only does Mattel have a product line-up that is delivering, but the company also has an exciting lineup of products about to be launched. This is where things really start to get exciting and where I think the catalyst for future growth can be clearly seen.
For starters, the company plans to globally re-launch the Monster High, Disney Princess and the Frozen franchises. While this is great, the bigger development has been the deals that the company has signed with Elon Musk’s Space Exploration Technologies, or SpaceX, and with Universal Studios for Jurassic World and Minions.
Featuring a variety of toys and collectibles, the SpaceX franchise is expected to be rolled out next year. I am more excited about the deal with Universal for Jurassic World. This is because, given that the latest movie, Dominion, marks the end of the Jurassic Park franchise after nearly 30 years, I expect a lot of nostalgia-driven sales for Mattel from this partnership.
Overall, future product launches, especially from the partnerships inked with SpaceX and Universal, are set to be strong drivers of future growth and are also set to complement the current line of products.
Mattel Operates in an Industry that is Virtually Recession Proof
Finally, it’s important to note that Mattel operates in an industry that is not only set for strong growth but is also virtually recession-proof. According to Fortune Business Insights, the global toy market is expected to grow from $141 billion in 2021 to $231 billion by 2028 at a CAGR of 7.8%. According to the same report, the Dolls segment has been one of the major categories, having captured nearly 30% market share in 2020. Given that Mattel houses one of the most popular dolls in the world, this should re-affirm the growth potential of this company in the long run.
Furthermore, when the world went into lockdown back in late March 2020 as a result of COVID-19, total toy sales in the U.S. grew by 26% in the last few weeks of that month, according to NPD Group. Are parents really going to stop buying toys for their kids? No. There is, of course, the possibility that the company would see a drop in the sales of big-ticket items, such as the Barbie dollhouse, which it experienced in the second quarter. However, overall, given that the industry is virtually recession-proof, the impending economic slowdown is unlikely to hurt Mattel as badly as some of the other companies in different sectors.
Valuation
|
Forward P/E Multiple Approach |
|
|
Price Target |
$27.00 |
|
Projected Forward P/E multiple |
14.2x |
|
Projected FY23 adjusted EPS |
$1.90 |
Mattel has set a goal to earn in excess of $1.90 in FY23, which would imply a 28% YoY growth (the high-end of the management’s guidance for FY22 adjusted EPS is $1.48).
This projection, in my opinion, is quite reasonable considering the company’s product pipeline and the expected jump in sales, in FY23, as a consequence of the Barbie movie.
The company is currently trading at 11.8x the projected FY23 earnings, which, in my opinion, is low, especially since its peer Hasbro (HAS) trades at 14.2x forward earnings and Mattel’s own historical forward P/E is nearly 19x.
Taking a conservative approach, I assume that Mattel will trade at the same multiple as Hasbro, which gives a target price of approximately $27.00, based on its projected FY23 earnings. This represents a 21% upside to the closing price on Tuesday, 26th July 2022.
Risk Factors
The company’s debt levels are concerning. According to Refinitiv, Mattel’s interest coverage ratio stood at 3.01 for FY21, and while this figure is significantly better compared to previous years (it was 1.95 in FY20 and 0.37 in FY19), it is nowhere high enough for investors to be comfortable. Comparably, Hasbro’s interest coverage ratio stood at close to 5.0 for FY21. The company has been paying off its debt consistently in the recent past; however, the $2.60 billion worth of debt is a figure that needs to be monitored, especially given that its cash balance currently stands at $274.50 million.
Furthermore, although the company is operating in an industry which can be deemed as recession proof, this does not mean that it is not facing the same issue that is currently plaguing all the other companies in the consumer discretionary sector: supply chain. Supply chain constraints were the root cause behind the surge in the company’s costs during the second quarter, resulting in a near 1% drop in gross margins.
In addition to supply chain problems, as mentioned earlier, the company is also seeing weakening consumer demand for its big-ticket items such as the Barbie dollhouse.
Concluding Thoughts
There is much to like about Mattel. I think the company has a phenomenal product lineup as of today. This lineup is expected to get even more exciting thanks to the deals the company has inked with the likes of SpaceX. The company’s key categories, Barbie and Hot Wheels, continue to do really well. More importantly, the company operates in an industry which is not expected to suffer as badly as others in the event of an economic slowdown.
Yes, there are major risks that investors must consider. In a market that sells off in a whim, Mattel could easily become a victim. However, from a long-term perspective, the valuation looks decent.
My childhood memories include playing with a lot of Hot Wheels cars, so it’s only natural that I think about making happy memories with the company during my grown-up years, especially now that Barbie is heading to Space.
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