Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • Nikkei

    40,369.44
    +201.37 (+0.50%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Bitcoin USD

    70,171.83
    -525.09 (-0.74%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • FTSE Bursa Malaysia

    1,536.07
    +5.47 (+0.36%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Why You Should Get Rid of Mattel (MAT) Stock Right Away

On Dec 28, the world’s largest toy manufacturer, Mattel, Inc. MAT, was downgraded by a notch to a Zacks Rank #4 (Sell).

Let’s take a look at some the reasons behind the downgrade:

Earnings & Revenue

Arguably, nothing is more important than earnings growth, as surging profit levels is often an indication of strong prospects (and stock price gains) ahead for the company in question. Mattel does not seem to fit in this criterion.

Till now, Mattel has put up a historical EPS growth rate of 3.1% compared with the industry average of 21.2%. Moreover, the company is looking to grow at a rate of 1.4% in the current year, way below the Zacks categorized Toys/Games/Hobby Products industry’s average, which calls for EPS growth of 14% in comparison.

A company’s solid revenue growth story mostly propels its earnings. However, Mattel’s projected sales growth for the current year is valued at a negative 1.9%, while the broader industry is expected to remain at its current level.

On the other hand, estimate revisions have moved marginally downwards for the company. While the current year estimates remained constant over the past two months, the current quarter and next year estimates have moved down by 1.4% and 0.6% respectively, during the same time frame.

Stock Performance

Shares of Mattel have underperformed the broader industry for the last six months. While the industry grew 0.5%, Mattel’s shares lost 8.6% over the same time frame.

Moreover, the stock has a beta of 0.98. A stock with beta close to 1, suggests that the price movement of the stock is highly correlated with the market. Since they are as volatile as the market, they are not entirely safe bets at the moment.



Macro Reasons

Age compression is hitting the toymakers revenue severely. For instance, previously, the demand for Barbie was more common among kids aged 3 to 9 years, which has narrowed down to 3 to 6 years. This is tapering the demand for traditional toys.

The iconic brands of the company also have to battle a broad array of alternative modes of entertainment, including video games, tablets and other electronic devices. Hence, toy makers are facing stiff competition from the manufacturers of such products like Electronic Arts, Inc. EA and Activision Blizzard, Inc. ATVI. These companies carry a Zacks Rank #2 (Buy) and Zacks Rank #3 (Hold) respectively, at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On the other hand, consumer spending uncertainty continues in the U.S. as customers are restraining their non-essential purchases. Meanwhile, weak performance in Western European and Latin American markets like Brazil due to a challenging macroeconomic environment remains a concern. Further, in Europe, the economic/political conditions are expected to remain challenging post Brexit. Meanwhile, although the company’s performance in China has been solid, a slowdown in the economy may hurt revenues, going forward.

Mattel has a considerable international presence and is therefore highly vulnerable to fluctuations in exchange rates. In fact, for full-year 2016, the company expects the negative impact of foreign exchange on net sales to be in the range of 2–4%.

Company-specific Concerns

Lack of innovative schemes for brand awareness and brand innovation has been affecting the company’s revenues and Point of Sales (POS) momentum. Though overall POS has been mostly positive owing to the company’s efforts to lower retail inventories, the improvement is not broad based. We need to wait for more consistent progress in all its brands.

Notably, Mattel believes that it will fall short of its 2016 gross margin expectations of nearly 50%. This is because currency headwinds and an unfavorable mix impact are likely to more than offset benefits from strategic pricing, supply chain efficiencies and cost savings initiatives. Further, costs related to marketing and promotional initiatives and for cleaning up inventories, along with the development of digital platforms should keep margins under pressure.

From 2016, Mattel no longer holds the profitable rights to develop dolls based on The Walt Disney Company characters from the animated movie Frozen and Disney Princess. Hasbro, Inc. HAS, another toy maker, gained the manufacturing rights for these dolls, beginning 2016, worldwide, except Japan. Though Mattel remains one of Disney’s major entertainment partners for a number of Boys and infant pre-school properties, the loss of rights would adversely impact its revenues. The partnership with Disney was a solid growth driver.

Some Respite

Mattel’s focus on improving point of sale through introduction of more products, brand innovation and strategic initiatives like entering into new categories and strengthening the Girls portfolio bode well. The company’s renewed contracts for toy franchisees of Cars 3 and Toy Story 4 are likely to boost its top line. The company’s efforts to achieve cumulative cost savings and enhanced margins are added positives.

Given the strong product line-up, which includes core brands, licensed brands and lucrative product associations, Mattel remains well positioned for growth. Owing to its popularity among young boys and girls, the company’s premier brand, like Hot Wheels, has been the category leader in the multiple product segments for several years. Mattel has also forayed into other consumer product categories such as apparel, fashion and accessories to build the brands.

Bottom Line

Though the company is undertaking various initiatives, it will take some time for all the brands to show consistent improvement. Costs related to sales-boosting initiatives may keep profits under pressure, while broad macroeconomic concerns might limit revenue growth. Thus, it remains prudent to get rid of Mattel shares at the moment, unless a huge turnaround marks its entry.

Zacks' Top 10 Stocks for 2017

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?

Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
HASBRO INC (HAS): Free Stock Analysis Report
 
MATTEL INC (MAT): Free Stock Analysis Report
 
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
 
ELECTR ARTS INC (EA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research