Mattel, Inc. (MAT) reported explosive fourth-quarter earnings spanning the holiday shopping season, which beat EPS and revenue expectations. This effort capped a banner year for the company which managed to streamline its operations with a focus on profitability. Indeed, the stock has risen over 30% in the past year, including a continued breakout in stocks that are now trading at a 5-year high. Our view is that the outlook is strong enough to warrant a higher valuation supported by broadly strong fundamentals. The attraction here is the company’s portfolio of iconic toy brands that are leveraged into global growth opportunities. We are bullish on MAT as a leader in the high quality industry, as the company is well positioned to further consolidate and grow its market share.
MAT Q4 Revenue Summary
Non-GAAP Q4 EPS for Mattel at $0.53 was $0.20 above consensus and up from $0.40 in Q4 2020. Revenue of $1.8 billion in the quarter, up 10% year over year, was also above estimates. For the full year, net sales were up 19% year-over-year, with earnings and free cash flow more than doubling from 2020 given the challenging period compositions in 2020.
While the adjusted gross margin at 49.3% was weaker this quarter under pressure from high material and freight cost inflation, Mattel still managed to push the operating margin up to 14.1% vs. 11.6% last year. This was achieved by lower general and administrative expenses in expenses as a percentage of revenues. This trend comes against the background of the company’s internal restructuring first announced in 2018. On this point, management said during the earnings conference call that the “turnaround is complete” and that the he company is now in growth mode.
Operationally, strength was broad-based, with all four major toy categories driving sales increases for the full year. In the fourth quarter, Action Figures led growth with billings up 25% over 2020, driven by “Jurassic Park” and “Masters of the Universe” products. Dolls were also strong with 13% growth in the quarter which includes “Barbie”, “Universal’s Spirit” and “Enchantimals” products.
2021 adjusted EBITDA crossed the $1 billion mark, up 43% year-on-year, while free cash flow at $334 million was also a record. The company ended the quarter with $731 million in cash versus $2.6 billion in long-term debt. Favorably, the leverage ratio fell to 2.6x from 4.1x at the end of 2020.
As an indication, management is targeting 2022 sales growth of between 8% and 10%. An ongoing supply chain and inflationary cost issues are expected to drop the adjusted gross margin to around 47%. Nonetheless, management believes it can generate 10% higher adjusted EBITDA with EPS between $1.42 and $1.48, which represents a 12% increase mid-term compared to 2021 thanks to new operating margin gains.
MAT Stock Price Prediction
What stands out to us when we look at Mattel is the 2023 guidance with EPS rising “above” $1.90 per share, which is nearly 30% above the median 2022 target. Current period consensus estimates for revenue and EPS are in line with the company’s message. We believe the goals are achievable.
The setup here assumes that some of the current supply chain challenges will normalize through 2022, supporting a stronger gross margin in 2023 and a higher leg up for profitability. The other significant momentum comes from an announcement in January that Mattel won a licensing deal from the Walt Disney Company (DIS) to produce princess dolls that were in the hands of competitor Hasbro, Inc. (HAS). This is essential as it supports an entire line of characters from the media giant’s portfolio which naturally generates higher demand and may also lead to higher prices.
Separately, Mattel is moving forward with film projects, including a new live-action barbie movie which is slated for release in early 2023. Mattel is also collaborating with Netflix, Inc. (NFLX) with toys tied to a Masters of the Universe movie. The plans are part of the strategy of leveraging the company’s broader intellectual properties. The point we are getting to here is that, as good as 2021 is in terms of operational and financial momentum, there is some visibility for more strength going forward.
In terms of valuation taking into account management EPS forecasts and consensus, MAT is trading at a forward P/E of 17.5x. It gets more interesting looking towards 2023 with an implied 1-year PER of 13.5x on consensus. It is curious that MAT continues to trade at a discount to Hasbro on several valuation multiples such as forward 1-year P/E as well as forward EV/EBITDA on the 2022 consensus estimate.
Hasbro has benefited in a recent year from more stable finances while offering a 3% dividend yield that Mattel has lacked since suspending its payout in 2017. Still, we can say that Mattel looks stronger with a better momentum in 2022 given the Disney princess doll arrangement and movie ties. The advantage here for MAT stocks is that the valuation gap can at least converge upwards. Although nothing has been announced, we believe MAT could reinstate a quarterly dividend within the next two years, supported by what is now strong underlying cash flow.
Is MAT a buy, sell or hold?
We rate MAT as a buy with a price target of $30.00 for the year ahead, representing a multiple of 16x on management’s 2023 EPS. Our thinking here is that at the current stock price level, MAT will start to look “cheap” over the next few quarters given the expectation of an acceleration in earnings over the next year. The deleveraging trend with lower net debt is also positive for valuation multiples.
Our price target would also help MAT approach Hasbro in terms of profit premium. The stock has already risen significantly in recent weeks, so a short-term consolidation makes sense. Longer term, the stock has more upside depending on how management executes its strategy of expanding growth opportunities.
To hedge risk, Mattel remains exposed to potentially volatile macroeconomic conditions. Headlines related to inflation and a potential slowdown in consumer spending may end up limiting demand for toys. Weaker-than-expected earnings in the coming quarters may also force a reassessment of long-term earnings prospects. Watchpoints include margin levels and cash flow trends.