Lowered Estimates, And Beyond! Hasbro And Mattel Out Of Favor With Sell-Side
According to Handler, Mattel's revenue and earnings per share shortfall in the first quarter was attributed to a lower level of reorders and a poor gross margin read. While Mattel's management believes an inventory issue has since passed the fact remains its lowered 2017 outlook puts the company in a "deeper than expected hole to dig out of."
Handler suggested that Mattel has seen "missteps" in four of the past five years, which naturally calls into question the prospects for a turnaround in 2017. The company's turnaround for 2017 requires a strong performance from "Cars 3" toys as the company already provided a $300 million revenue outlook.
However, investors need to see a more "broad based upturn" and an investor meeting scheduled for June could provide some visibility into the company's recently named CEO Margo Georgiadis' game plan. The meeting will also provide more insight if the company will slash its dividend, which currently yields nearly 7 percent.
Following the results, the analyst lowered his 2017 earnings per share estimate from $1.40 to $1.25 and the revised price target.
Hasbro: Cautious Heading Into Print
After Mattel's report, Handler also updated his thesis on rival toymaker Hasbro, Inc. (NASDAQ: HAS), which is scheduled to report its first-quarter results on April 24.
Handler believes that Hasbro likely benefited in the quarter from the release of the "Beauty and the Beast" film but there is downside risk due to a difficult year-over-year comparison from "Star Wars" and "Magic: the Gathering." Nevertheless, the first quarter is Hasbro's smallest of the four and any downside (or upside) shouldn't have much, if any, impact to its full year performance.
Handler is estimating Hasbro to earn $0.39 per share in the first quarter on revenue of $811 million, representing a drop from prior estimates of $0.40 per share and $824 million. The analyst also expects gross margins to fall by 30 basis points from 65.1 percent to 64.8 percent due to higher input prices.
Handler also suggested that as opposed to Mattel's history of blunders, Hasbro has actually "done a very good job" over the past three years in executing on its strategy.
Finally, the analyst cited Hasbro's valuation in maintaining a Neutral rating and $100 price target (21x his 2017 earnings per share estimate) and as such he does not see sufficient reasons for investors to become more constructive.
Moving The Needle
At last check:
- Mattel shares were down 11.6 percent at $22.28.
- Hasbro shares were up 0.22 percent at $96.22.
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