Putting the Pedal to the Mattel

Mattel Inc.’s (MAT’s) stock price looks to have broken out of it 2021 trading pattern this month. On February 9th, the California-based multinational toy manufacturer reported impressive results for the 2021 fiscal fourth quarter, beating analyst earnings per share expectations of 0.33 USD by 66%. Not only this, but Mattel have recently announced a new licensing deal with Walt Disney and will add toys inspired by the Disney Princess and Frozen franchises to their portfolio by 2023. The company is already known as the makers of Barbie and Hot Wheels, owners of Fisher-Price and producers of Minecraft, Jurassic World, and WWE-themed toys. But it is far from the first time that there has been a buzz around the company, and their last partnership with Disney ended in disappointment.   

Since the start of the year, Mattel stock is up almost 20%. However, by many measures, the company is still undervalued. When compared to that of its major rival, Hasbro Inc., Mattel’s price to earnings ratio of 9.77 is staggeringly low (Hasbro’s is 27.55). Additionally, when compared to Hasbro’s price to sales ratio of 2.10, Mattel’s 1.64 is impressive. Traditionally, the two companies have been close rivals and the Disney contract has been their highly sought-after prize. In fact, it was from Hasbro that Mattel have recently captured Disney’s business. However, last time Mattel held the Disney contract it ended poorly for the toymaker; they lost their licence in 2015 as the relationship fell apart. The loss of the contract left a hole at the heart of the business that management struggled to fill. Mattel shares lost almost 50% of their value as the company went through four CEOs in as many years.

It was not until 2018 that Israeli-born Ynon Kreiz stepped in, implementing progressive targets and a renewed focus on financial prudence. Upon their last quarter results, Kreiz claimed that the company had made “significant progress on [their] transformation strategy”, marking the completion of their turnaround. Undoubtedly, Kreiz has done a stellar job of improving the company’s balance sheet. In September last year, Mattel had 3.62 billion USD in long-term debt, a reduction from their pre-pandemic levels which were often in excess of 4.5 billion USD. Offsetting this, Mattel had 1.5 billion USD in cash and short-term receivables and has grown its earnings before interest and taxes (EBIT) by 166% over the past 12 months. Kreiz also hopes that the company’s bonds will receive an investment-grade rating in the coming year, which should give the toymaker cheaper and easier access to credit. 

But Kreiz is not done, and, with the business finally on firmer footing, Mattel reported that it would shift its focus from stabilisation to growth. Indeed, the company have announced several high-profile expansions of their brands into new, innovative sectors such as gaming, films and TV, and even the metaverse. Kreiz claimed that the company had around 20 film projects in production and a further 25 in development stages, maintaining that this was “not done to sell more toys” but to provide quality entertainment. Certainly, the company has already managed to sign on some impressive names for their upcoming projects: Vin Diesel in the Rock ‘Em Sock ‘Em Robots movie, Tom Hanks for the Major Matt Mason project, and Margot Robbie and Ryan Gosling reportedly taking leading roles in an upcoming Barbie movie. Additionally, Mattel expects the coming ‘Jurassic World Dominion’ and ‘Lightyear’ movies to fuel sales in their Toy Story and Jurassic World themed products.

Although it is a unique subsector, there are undoubtedly dangers to investing in toymaking. Firstly, barriers to entry in the industry are low and this can produce spikes in the competition for, and therefore the price of, new licencing agreements. Inflation will also undoubtedly cause problems for toy manufacturers; many modern, technology-orientated toys come at a high price and the ability of companies to pass on their costs to retailers will be key. Ultimately, however, their success over the coming year will be a function of the price that consumers are willing to pay. Parents may be inclined to splash out for toys, but with prices already climbing over the past decade and toy design becoming more and more sophisticated, prices are seeming unrecognisable from many parent’s childhoods. That said, Mattel’s strong brand names and investment in new projects will be crucial factors in maintaining demand; Barbie, for instance, became the number one toy brand globally in 2021 and looks hard to beat this year.

In summary, Mattel seems well placed to capitalise on their newly found market position. Largely thanks to CEO Ynon Kreiz, the company has a much improved balance sheet, an ambitious plan for the future, and the coveted Disney contract. Certainly, Mattel’s comeback story is over, and a new era of growth is coming. However, 2022 will not provide the macroeconomic conditions that Mattel would hope for, and the toy industry can often be a fickle one. Holding onto their vital contracts and weathering inflation should be top priorities if the company are to complete their return to dominance.

Analyst: Alex Mortimer

Edited by Robert Armstrong-Jones