Supply Chain Diversification Will Secure Future Resilience

Key Takeaways

• Diversifying supply chains and reducing China reliance will stabilize costs, protect margins, and support earnings despite tariffs.
  
• Strategic alliances and entertainment investments will drive future revenue growth and enhance brand value for long-term expansion.
  
• Global trade uncertainties, tariffs, and supply chain reconfigurations pose risks to Mattel's costs, gross margins, and revenue, particularly with potential consumer resistance to price hikes.

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's strategy of accelerating diversification of its supply chain and reducing reliance on China-sourced products is expected to mitigate potential cost impacts from tariffs, which should help protect net margins and support stable or improved earnings.
  
• The commitment to optimizing product sourcing and mix, along with dual sourcing, enhances efficiency and flexibility, potentially stabilizing costs and supporting gross margin and profitability even in a volatile trade environment.
  
• Strategic pricing actions in collaboration with retail partners, focusing on maintaining a broad range of affordable price points, aim to shield revenues from the adverse impact of increased tariffs while protecting net margins.
  
• Ongoing cost savings initiatives, such as the expansion of the Optimizing for Profitable Growth program, aim to generate significant savings ($80 million in 2025), positively impacting net margins and supporting improved earnings.
  
• Investments in partnerships and entertainment ventures, like new licensing agreements with major franchises and development of movies and digital games, are expected to drive future revenue growth and enhance brand value, supporting top-line expansion.

Mattel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mattel's revenue will grow by 1.7% annually over the next 3 years.
• Analysts are assuming Mattel's profit margins will remain the same at 9.8% over the next 3 years.
• Analysts expect earnings to reach $557.0 million (and earnings per share of $1.93) by about May 2028, up from $529.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Leisure industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 4.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Mattel Future Earnings Per Share Growth

Risks

• Global trade uncertainty and potential tariffs present a risk to Mattel's cost structure. While mitigating actions are in place, any failure to fully offset these costs could impact net margins and earnings.
  
• The decision to pause full-year 2025 guidance highlights uncertainty in consumer demand, particularly surrounding economic volatility and the impact of tariffs, which could affect revenue forecasts.
  
• The evolving U.S. tariff situation could lead to delays and cancellations in inventory shipments, as noted by the Toy Association. This could affect not only the availability of Mattel's products but also revenue.
  
• Dependency on supply chain reconfigurations, such as moving production out of China, involves risks related to execution and timing. Any delays or increased costs in this transition could impact gross margins.
  
• While attempts to pass on price increases to consumers may be necessary, there is inherent risk regarding price elasticity. If consumers or retailers push back on price increases, it could reduce sales volume and negatively impact revenue and earnings.

Valuation

• The analysts have a consensus price target of $23.729 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 $30.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $557.0 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $16.65, the analyst price target of $23.73 is 29.8% 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.