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Barbie Loves Shopping, So Is Mattel Worthy Of Throwing It In Your Portfolio?

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Mattel Inc. (NASDAQ: MAT) is set to report earnings tomorrow, and everyone will be paying attention to the El Segundo, CA-based toy company to see how sales shaped up in the previous quarter.

The company, which produces toys for Disney's (NYSE: DIS) "Cars" movies, is expected to earn 16 cents per share on $1.11 billion in revenues. This is up from last year, when Mattel reported earnings of 14 cents per share on $1.04 billion in revenues. If Mattel is able to meet or beat these earnings, it would be a 14.3% gain in earnings and a 8.2% jump in revenue from last year.

Wall Street is expecting guidance for next quarter to be 85 cents per share on $1.96 billion in revenues. For the full year, Wall Street is expecting earnings of $2.07 per share on $6.24 billion in revenues.

The company has been able to generate strong returns on equity, over 26%. A high return on equity is something that is a sign of a strong business, and is the one number that Warren Buffett says you can not fake. The company has a higher ROE than its main competitor, Hasbro.

The company has not done as good a job as monetizing its products as Habro (NASDAQ: HAS) has done with its "Transformers," "Battleship" and other lines, but there is significant potential for the company to be able to do that in the future.

The company is cheap at these levels, trading at 11.7 times forward earnings, and sports a 1.5 PEG ratio. Shares also sport a strong dividend yield, yielding 3.4% at these levels. Over the past 52 weeks, shares have returned 19.2%, slightly below the 20.3% that the S&P 500 has returned over the same time frame.

Mattel is most famous for its Barbie dolls, Hot Wheels and Matchbox cars, and Fisher Price toys. Having the rights to the Barbie, Hot Wheels and Matchbox properties could prove to be very lucrative, especially if Mattel decides to go the Hasbro route and turn these franchises into movies. What the movies did for Transformers was nothing short of astounding, and Hot Wheels and Matchbox, along with Barbie could prove to be very lucrative franchises.

Americans love racing movies, (see Fast & Furious), so the Hot Wheels and Matchbox franchises could have these types of movies, or perhaps a "Toy Story" type of movie, made in CGI. The possibilities are endless. There is also significant potential to expand the American Girl brand, which is higher priced dolls. The stores are a gold-mine if you have ever been in one.

Mattel does have caveats about it, specifically the ongoing litigation with MGA over the rights to the Bratz dolls. In a recent ruling, a federal jury awarded MGA with $88.4 million in damages, saying Mattel did not own the rights to Bratz. Mattel could continue to pay higher royalty costs for Bratz, which would pressure margins.

So how to play Mattel?

ACTION ITEMS:

Bullish:
Traders who believe that Mattel will report strong earnings and guidance might want to consider the following trades:

  • Go long Mattel, or perhaps long dated options to give yourself time for Mattel to perhaps begin to monetize its portfolio in different ways.

Bearish:
Traders who believe that Mattel will miss earnings and will not monetize its portfolio may consider alternate positions:

  • Shorting Mattel could prove to be profitable, especially considering the company has significant foreign currency exposure that could lead to earnings misses.
  • Go long Hasbro if traders believe that Mattel is losing market share to Hasbro.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Mattel together with its subsidiaries, engages in the design, manufacture, and marketing of various toy products worldwide. Its products comprise fashion dolls and accessories, vehicles and playsets, and games and puzzles. The company offers its products under Mattel Girls and Boys brands, including Barbie, Polly Pocket, Little Mommy, Disney Classics, Monster High, Hot Wheels, Matchbox, Battle Force 5, Tyco R/C, CARS, Radica, Toy Story, Max Steel, WWE Wrestling, and Batman, among others.

Posted-In: Barbie Hot WheelsEarnings Long Ideas News Guidance Short Ideas Trading Ideas Best of Benzinga

 

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