Sell-Side Split On Mattel After Q4 Beat

Mattel, Inc. MAT shares jumped higher Thursday on a fourth-quarter earnings beat and were continuing the gains Friday. Toy investors were by and large satisfied, but analysts remain divided. 

"We have seen turnaround stories in some dead old names," said David Russell, vice president at Tradestation. "This is one of those things that can happen even in a bearish market. Companies that we don't think about, like Mattel, can show there is still some turnaround potential and can get new attention from investors."

The Analysts 

• BMO Capital Markets analyst Gerrick Johnson maintained an Outperform rating on Mattel and raised the price target from $20 to $23.
• MKM analyst Eric Handler maintained a Neutral rating and lifted the price target from $12 to $15. 
• CFRA analyst Camilla Yanushevsky downgraded Mattel from Hold to Sell and raised the target from $3 to $13.

The Thesis

CFRA turned bearish despite a 14.6-percentage-point gross margin expansion. A net sales decline and an overall 2-percent drop across the toy industry kept the research firm cautious. 

“While MAT didn't disclose the timeline of new collaborations with Warner Bros. and National Geographic, we view these diversification initiatives as a risky strategy amid mounting debt and deteriorating free cash flow,” Yanushevsky said in the Thursday downgrade note.

“We expect MAT to continue to struggle to recover lost sales from Toys 'R' Us as children play with tablets more than traditional toys.”

BMO Capital interpreted Mattel’s prospects differently. In fact, Johnson’s estimates suggest strong demand for the brand that could have yielded higher sales under less risk-averse strategies.

“We think MAT's performance could have been even better had it shipped more into the market,” the analyst said in a Friday note. “During the holiday season we observed quite a few sell-outs of MAT's products, especially Hot Wheels. However, the right decision was to risk leaving some sales on the table rather than risk ending the year with too much inventory either in the channel or its own distribution centers.”

Attributing the sales drop to a reversible Toys 'R' Us headwind, Johnson celebrated a surprise profit and forecast growth in 2019.

“The turnaround plan appears to be going well, on track to exceed its $650 million savings target,” he said, citing pleasing channel inventory levels for 2019.

MKM’s middle-of-the-road rating reflected both bull and bear concerns. 

“Cost savings initiatives are advancing faster than projected, but our uncertainty remains with revenue and the direction it could take over the next 12-24 months,” Handler said in a Friday note. 

The analyst forecast gross-margin growth and profitability, but said he expects challenges in the beleaguered Fisher Price, American Girl and Toy Box brands throughout the next year.

Price Action

Mattel shares were up 22.33 percent at $15.12 at the time of publication Friday. 

Related Links:

Analyst: Mattel's Fundamentals Don't Warrant Its Recent Run

The Toy Story: After Weak Holidays, Hasbro Set for Rebound, Mattel Reliant on Barbie

Photo by Eva Rinaldi via Wikimedia.