Mattel

by Zacks Equity Research

November 01, 2012 |
MAT

Mattel Inc. (MAT - Analyst Report) reported solid third quarter results last month that included a positive earnings surprise. Afterwards, shares reached a 52-week high of $37.96 on October 19, while Zacks Consensus Estimates for fiscal years 2012 and 2013 moved higher.

In addition, this Zacks #2 Rank (Buy) toy manufacturer pays a dividend that yields 3.4% annually, making it attractive for investors seeking both growth and income.

Fabulous Third Quarter

On October 16, Mattel reported third quarter earnings of $1.04 per share, outpacing the Zacks Consensus Estimate by 4.0% and the year-ago earnings by 21.0%.

Net sales grew 4% year over year to $2,077.8 million, beating the Zacks Consensus Estimate of $2,076.0 million. Net sales included an unfavorable foreign currency impact of 3 percentage points. U.S. gross sales increased 6% year over year while international gross sales nudged up 2%.

Gross sales for the Mattel Girls & Boys Brands business unit expanded 3% year over year to $1,371.1 million. Sales for Other Girls Brands shot up 57%, driven by Monster High. Fisher-Price Brands sales climbed 6% to $790.4 million, while the American Girl line leapt 16% to $102.0 million.

Gross margin expanded 590 basis points (bps) year over year to 53.7% while operating margin improved 360 bps to 23.5%.

Earnings Momentum Improving

Over the last 30 days, the Zacks Consensus Estimate for 2012 increased 3% to $2.53 per share, based on upward revisions from 8 of 10 estimates. This implies year-over-year growth of 16.0%.

For 2013, the Zacks Consensus Estimate is $2.79 per share, marking an upswing of 2%, thanks to 8 upward revisions out of 11 estimates. The current estimate suggests year-over-year growth of 10.4%.

Strong Dividend

Mattel pays a solid dividend. Since 2002, the company has increased its dividend 8 times and continued to pay even during the recession. The latest hike of 35% was announced in January 2012. Currently, the company pays a quarterly dividend of 31 cents per share, affirming a yield of 3.4%. The average five-year yield stands at 3.7%.

Reasonable Valuation

Considering the company’s growth prospects, its valuation looks reasonable. Mattel is currently trading at a forward P/E of 14.6X, a premium of 6.5% to the peer group average of 13.7X. In addition to P/E, the stock is also trading at a forward P/B of 4.33x and a P/S of 1.99x, compared with the peer group’s P/B of 1.48x and P/S of 1.25x.

Moreover, the company has a 1-year return on equity (ROE) of 31.8%, substantially higher than its peer group average of 2.0%. The company also has an attractive long-term estimated earnings per share growth rate of 9.4%.

Chart Shows Potential

The price and consensus chart demonstrates that the earnings estimate lines for 2012, 2013 and 2014 are hovering above the stock price, indicating that Mattel is undervalued. Currently, the stock price is up 32.7% year to date, significantly higher than the S&P 500’s return of 12.3%.

Mattel designs, manufactures, and markets a wide variety of family products worldwide through both sales to retailers and consumers. The company generates the largest part of its revenue from the Mattel Girls & Boys Brands segment. Other segments include Fisher-Price Brands and American Girl Brands. With a market capitalization of $12.0 billion, Mattel primarily competes with JAKKS Pacific, Inc. (JAKK) and Hasbro Inc. (HAS).


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