Should Investors Continue Playing With Mattel's Stock?

Mattel Inc MAT reported third-quarter results that exceeded expectations due to what management described as "extraordinary" demand for toys.

Shares are up more than 10% in Friday's session. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

MKM Partners analyst Eric Handler maintains a Neutral rating on Mattel's stock with a price target lifted from $13 to $14.

UBS analyst Arpine Kocharyan maintains a Neutral rating on Mattel with a $12 price target.

KeyBanc Capital Markets analyst Brett Andress maintains an Overweight rating on Mattel with a price target lifted from $14 to $16.

MKM: Improving Recovery Outlook

Mattel "easily" beat expectations as revenue improved in three of the four reporting segments, Handler wrote in a note. Specifically, Barbie sales were up 30%, Vehicles up 6.5%, and Action Figures/Building Sets/Games were up 14% but Infant/Toddler/Preschool sales were lower.

Gross margin improved 410 basis points year-over-year to 51% due to a favorable revenue mix, cost savings, lower royalty payments, among other initiatives.

Looking forward to the holiday shopping season "appears quite good" and this should help full-year 2020 revenue approach last year's total revenue while operating margin should double to 8.6%.

Despite a strong quarter and signs of momentum, Handler said the company's elevated net leverage and low free cash flow generation imply a bullish stance can't be justified now.

UBS: Conservative Guidance?

Mattel reported an earnings beat against "already upbeat expectations" but investors are looking forward to the end of 2020 and are questioning if management's outlook is conservative.

The company is guiding for full-year EBITDA of $625 million to $650 million and the math behind the outlook implies a fourth-quarter guidance of $190 million to $215 million, Kocharyan wrote in a note. While this is below UBS's prior estimate of $265 million, it's important to note Mattel's internal projections were modeled in August.

"In other words, Mattel did not anticipate strong POS [point of sales] out of Q2 to hold up at these levels into fall," the analyst wrote.

KeyBanc: Raising Estimates

Mattel's report was "solidly above expectations" due to low inventories, sustained POS momentum, and a bullish holiday outlook, Andress wrote in a note. The recent momentum prompted the research firm to revise its estimates upward as followed:

2020 EBITDA estimates were lifted from $520 million to $645 million due to the strong third-quarter beat, the timing of advertising spend, and a favorable "demand chasing dynamic."

2021 EBITDA was also lifted from $675 million to $685 million due to signs of an "increasingly sustainable growth trajectory."

"Looking LT, we continue to see a favorable risk/reward, supported by our view of MAT's transition back onto offense as its turnaround matures and top-line visibility continues to improve," Andress wrote.