Innovative Products And Entertainment Ventures Propel Growth Amid Financial Challenges

Key Takeaways

• Introduction of new product innovation and expansion into digital gaming through self-publishing are poised to significantly boost Mattel's revenue and net margins.
  
• Strategic focus on leveraging intellectual property across film, television, and digital gaming suggests opportunities for diversified revenue streams and enhanced profitability.
  
• Challenges in revenue growth, conservative production strategies, rising SG&A expenses, risky entertainment and digital ventures, and global economic uncertainties threaten profitability.

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.

• The introduction of new product innovation and increased retail support is anticipated to drive growth in sales, reflecting positively on revenue in the second half of the year.
  
• The expansion of Mattel's entertainment offering, including successful licensing agreements and ventures into digital gaming with the development and self-publishing of mobile games, is expected to significantly increase revenue and profit with low investment, impacting both revenue and net margins.
  
• Strengthened balance sheet and significant free cash flow improvement, influenced by operational efficiencies and cost management strategies such as the Optimizing Profitable Growth program, suggest an enhanced ability for share repurchases, potentially improving earnings per share.
  
• International market expansion, particularly in the APAC region where high single-digit growth was observed, is anticipated to contribute to revenue growth, supported by Mattel's strong global brand presence and share gains.
  
• Enhanced focus on capturing the full value of Mattel's intellectual property outside the toy aisle, through ventures into film, television, and digital gaming, indicates opportunities for diversified revenue streams and increased profitability.

Assumptions

• Analysts are assuming Mattel's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $576.3 million (and earnings per share of $1.78) by about September 2027, up from $322.2 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 15.2x on those 2027 earnings, down from 19.5x today. This future PE is lower than the current PE for the US Leisure industry at 16.8x.
• Analysts expect the number of shares outstanding to decline by 4.02% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Risks

• Declining net sales and gross billings highlight potential challenges in revenue growth, affecting overall financial stability and investor confidence.
  
• Inventory reductions suggest a conservative approach to production and distribution, possibly impacting revenue if demand exceeds forecasts.
  
• Increased Selling, General, and Administrative (SG&A) expenses, driven by pay increases, technology upgrades, and talent acquisition for the entertainment strategy, could pressure net margins if sales don't increase proportionally.
  
• The focus on entertainment expansion and self-publishing in digital gaming presents execution risk and an uncertain return on investment, potentially impacting earnings if these new ventures don't meet financial expectations.
  
• Global economic uncertainties and potential for increased material costs or supply chain disruptions could negatively affect cost of goods sold (COGS) and gross margin, reducing overall profitability.

Valuation

• The analysts have a consensus price target of $23.52 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 $27.0, and the most bearish reporting a price target of just $18.25.
• 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 $576.3 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $18.44, the analyst's price target of $23.52 is 21.6% 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.