Accelerating Entertainment And Hot Wheels Innovations Fuel Prosperous Growth Trajectory

Key Takeaways

• Strategic focus on IP-driven toy business and entertainment could boost revenue through diversified growth avenues.
  
• Supply chain improvements and cost savings enhance net margins and EPS through margin expansion and share repurchases.
  
• Heavy reliance on movie tie-ins and exposure to geopolitical risks could destabilize earnings and margins amid declining industry conditions and inflationary pressures.

Catalysts

A toy and family entertainment company, designs, manufactures, and markets toys and consumer products in North America, Latin America, Europe, the Middle East, Africa, and the Asia Pacific.

• Mattel is executing a multiyear strategy to grow its IP-driven toy business and expand its entertainment offering, which could drive revenue growth from both toy sales and entertainment ventures.
  
• The company has seen significant margin expansion driven by supply chain improvements and cost savings, which can positively impact net margins.
  
• Strong performance and innovation in the Hot Wheels brand, including new partnerships like the one with Formula One, could fuel future revenue growth.
  
• Mattel is engaged in ongoing share repurchases, which can enhance earnings per share (EPS) by reducing the number of shares outstanding.
  
• The Optimizing for Profitable Growth program is expected to bring $200 million in savings by 2026, contributing to improved net margins and earnings.

Mattel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mattel's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.2% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $566.1 million (and earnings per share of $1.76) by about November 2027, up from $548.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $484.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2027 earnings, up from 11.3x today. This future PE is lower than the current PE for the US Leisure industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Mattel Future Earnings Per Share Growth

Risks

• The reduction in net sales by 4% and slight decline in market share year-to-date suggests potential pressure on future revenues.
  
• The toys industry is expected to decline modestly in 2024, which could impact overall market conditions and Mattel's ability to grow sales.
  
• There is significant exposure to China for manufacturing, with 50% of production based there, which poses a supply chain risk due to geopolitical tensions and tariffs, potentially impacting cost and margins.
  
• Inflationary pressures anticipated in the fourth quarter could hinder margin expansion, negatively impacting net margins.
  
• The heavy reliance on the success of blockbuster movie tie-ins, as shown by the Barbie movie's substantial impact last year, introduces volatility in earnings if similar levels of success cannot be replicated annually.

Valuation

• The analysts have a consensus price target of $23.96 for Mattel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.8 billion, earnings will come to $566.1 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of $18.31, the analyst's price target of $23.96 is 23.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.