Mattel Inc. (MAT), which is headquartered in El Segundo, Calif., is a global leader in children’s entertainment, specializing in the design and manufacture of high-quality toys and consumer goods. Its portfolio of iconic franchises includes Barbie, Hot Wheels, American Girl, Fisher-Price, Thomas & Friends and Mega, and other popular brands that it owns or licenses in partnership with global entertainment companies.

The company’s shares have gained 44.6% in price over the past year to close Friday’s trading session at $20.63. Its top-line growth, driven by its portfolio of iconic brands and major product launches, has contributed to the price rally. 

However, we fear that the industry-wide challenges that the company faces could negatively impact its fundamental performance in the coming months despite the high holiday-season demand.

Here’s what could shape MAT’s performance in the near term:

Industry Headwinds

While toy demand is at an all-time high, severe global supply chain bottlenecks threaten to leave shop shelves bare this Christmas season, forcing retailers and suppliers to scramble for methods to speed up product shipments. In addition, supply constraints have resulted in cost increases, and several companies are considering changing their production operations to avoid a decline in already-low margins. These factors could negatively impact MAT’s price performance in the near term.

Strong Profitability

MAT’s 15.7% trailing-12-months net income margin is 148.9% higher than the 6.3% industry average. Also, its 10.2% and 12.8% respective ROC and EBIT margin are higher than its 7.8% and 9.5%, industry averages. Furthermore, its $474.5 million in trailing-12-months cash from operations is 127.3% higher than the $208.78 million industry average.

Premium Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 18.97x, which is 28.9% higher than the 14.71x industry average. Also, its 1.35x forward Price/Sales multiple is 9.8% higher than the 1.23x industry average. Furthermore, MAT’s 1.85x forward EV/Sales is 27.6% higher than the 1.45x industry average.

The stock’s 5.4x forward Price/Book multiple is 114.2% higher than the 3.58x industry average.

POWR Ratings Reflect Uncertainty

MAT has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MAT has a D grade for Growth. The company’s mixed financials in its last reported quarter justify the Growth grade.

The stock also has a C grade for Stability. The stock’s 1.52 beta is consistent with the Stability grade.

Of the 23 stocks in the C-rated Entertainment – Toys & Video Games industry, MAT is ranked #16.

Beyond what I’ve stated above, one can view MAT ratings for Quality, Value, Momentum, and Sentiment here.

Bottom Line

MAT’s shares have gained 6.2% in price over the past month, but ongoing supply chain disruptions and labor shortages could pose significant challenges to the company’s current share price rally. Thus, we think investors should wait for the industry’s prospects to stabilize before investing in the stock.

How Does Mattel Inc. (MAT) Stack Up Against its Peers?

While MAT has an overall C rating, one might want to consider its industry peer, DoubleDown Interactive Co. Ltd (DDI), Spin Master Corp. (SNMSF), and Playtika Holding Corp. (PLTK) having an overall B (Buy) rating.

MAT shares were trading at $20.99 per share on Thursday morning, up $0.36 (+1.75%). Year-to-date, MAT has gained 20.29%, versus a 23.33% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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