DA Davidson Cuts Mattel's Price Target Despite Q2 Sales, EBITDA Beat

Mattel Inc MAT reported second-quarter sales and EBITDA ahead of expectations. The company’s operating cash flow in the quarter was disappointing and its free cash flow could turn negative for 2019, according to DA Davidson.

The Analyst

DA Davidson’s Linda Bolton Weiser maintained a Neutral rating on Mattel while lowering the price target from $13.50 to $13.

The Thesis

Mattel reported second-quarter net sales at $860 million, significantly higher than the consensus estimate of $822 million. In constant currency terms, net sales grew 5% and gross sales were up 4%, Bolton Weiser said in the note.

The company’s EBITDA came in positive, at $42 million, much better than the consensus expectation of a loss of $6 million. The analyst noted operating cash flow was negative, at -$208 million, versus DA Davidson’s estimate of -$189 million.

Mattel achieved cost savings of $754 million, exceeding its year-end target of $650 million. Management expects an additional $100 million in cost savings in the back half of the year. Although the company is identifying more opportunities to cut cost, future savings are likely to come from ongoing productivity initiatives, Bolton Weiser mentioned.

Moreover, the company reinvested only $27 million in the first half of 2019, versus its plan of $90 million for the entire year. Given the higher-than-expected cost savings and lower-than-expected reinvestment, “we are surprised that operating profit beat our estimate by only $12M in 2Q19,” the analyst wrote. She added that the sales boost from "Toy Story 4" has been underwhelming.

Price Action

Shares of Mattel were up 12.7% to $14.10 at time of publishing.

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