Matthew Greenberg, The Real Free Market (44 clicks)
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Mattel Is Still A Risky Bet
Nov. 30, 2015 1:22 AM ET | 4 comments | About: Mattel, Inc. (MAT)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
Mattel's third quarter did not show any changes in Mattel's underlying problems.
Regardless of what the fourth quarter looks like, Mattel will need to cut its dividend.
The dollar will continue to gain strength- Mattel will not be able to offset weakness in US sales through international sales.
Mattel is still overvalued compared to its peers- it makes little sense to bet on a turnaround at this point as Mattel continues to dilute share value.
Mattel (NASDAQ:MAT) reported third quarter earnings October 15th, where earnings missed consensus estimates by over 10% ($0.71 versus $.79 estimated). Despite this earnings miss, the stock rallied on an optimistic tone from CEO Christopher Sinclair about the progress in Mattel's turnaround. However, investors have really misinterpreted this quarter. There is still no concrete evidence of a turnaround.
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For investors who have been following Mattel, this sudden rise in stock price should be surprising. An optimistic tone from the CEO about the turnaround has been the norm since he took over in January. Since then, not much has changed, with the exception of cutting expenses and cutting employee benefits.
As I wrote in this article from August of this year, most of Mattel's future is based on the hope that the new CEO can turn the ship around and start embracing the new modern feminist and female empowerment culture, as Mattel's competitors have been doing. This is not something that can happen overnight, as many investors seem to believe. I raised the warning flag about this issue last August, predicting Mattel's drop, and it took Mattel nearly a year to start taking it seriously. Now, that space is crowded and it remains to be seen if Barbie can compete in this female empowerment sub sector of the doll market.
There also seems to now be the prevailing belief that Mattel will not cut its dividend. This is simply not true. Mattel took out over $160 million in debt last quarter to pay its dividend-this debt is due within a year, so this was simply used to make sure the dividend was paid before Mattel's cash starts coming in next quarter from retailers who bought Mattel inventory for the holiday season. Furthermore, Mattel sold over $2.8 million worth of stock in the last quarter. This is the third quarter in a row that Mattel has ditched buybacks in favor of diluting share value and in turn hurting EPS and increasing their dividend payment.
Regardless of fourth quarter results for Mattel, the dividend will need to be cut in the near future. Mattel cannot continue to borrow to pay its dividend, as rising rates will make new debt issuance more expensive, especially because of Mattel's declining credit rating with a negative outlook. Mattel is rated Baa1 by Moody's and BBB S any further debt issuance could lead to junk status.
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This ever increasing payout ratio has become unsustainable, and will be cut. I stand by my analysis from this August speculating that the dividend will be cut before Q3 2016, which is when Mattel's first of its upcoming bond payments will be due.
Additionally, Mattel still faces threats from a strengthening dollar.
Nearly half of Mattel's sales are from international markets, and with US markets losing appetite for Barbie, that percentage is likely to continue to increase. A likely rate hike in December of this year would push the dollar higher and become an even stronger headwind for Mattel.
Many investors believe that Mattel is a bargain at current prices. However, despite Mattel's selloff the past few months, Mattel is still overvalued compared to its peers.
Company P/E Ratio
Mattel 26.92
Hasbro 21.44
Jakks Pacific 18.15
At this point, investing in Mattel entails paying a premium for a stock attempting a turnaround with an imminent dividend cut. With Mattel continuing to dilute share value (which will reflect negatively on EPS), risk averse investors would be wise to avoid Mattel at the current time.