Leading The Way? Analysts Not Yet Ready To Buy Mattel Despite Earnings Beat, Stock Surge

The post-Toys-R-Us toy market is thriving. Mattel Inc MAT surged Wednesday after outperforming Street estimates in its third-quarter earnings report.

The Earnings

With help from Barbie and Hot Wheels, Mattel beat consensus estimates on sales, cost savings and earnings before interest, tax, depreciation and amortization. Sales in American Girl, Fisher-Price and Thomas & Friends brands declined.

Mattel’s point of sales metric saw low-single-digit declines, partially offset by doll and vehicle performance. Sales pull-forward — attributed to retailer uncertainty around potential December tariffs — drove shipments up 3%.

“The company's recovery efforts are taking hold in 2019 and we are becoming more comfortable with a return to positive EPS in 2020,” MKM Partners analyst Eric Handler wrote in a note. “However, we remain concerned about the ability to achieve consistent revenue growth (especially for Fisher Price to turn the corner and grow), the slope of Mattel's EPS growth curve over the next two years and our FCF expectations will remain negative in 2020.”

Others walked away with less tempered optimism.

“Fundamentals, lower than anticipated inflation and tight working capital management are driving a positive 2019 operational cash flow outlook,” Wells Fargo analyst Timothy Conder wrote.

Some saw still more to celebrate.

“The company continues to pace ahead of its target of $650 million in run-rate savings exiting '19, and making progress in implementing a capital light model (with savings beginning next year),” Stifel analysts Drew Crum and David Pang wrote.

Comparative Performance

Confidence had been relatively low heading into Tuesday. Hasbro, Inc. HAS had reported a major earnings miss a week before, and many assumed its dismal report portended a Mattel stumble.

“We view the only plausible explanation why MAT did not see the Q319 shift experienced by HAS, of retailers taking less direct imports and more U.S. delivered product ahead of potential China tariffs, lies in ‘contingent optionality’ offered retailers,” Conder wrote.

He suspects that Mattel abated sales concerns offering to offset potential tariff costs imposed on retailers.

“This avoided a costly disruption to the supply chain/logistics/warehousing that occurred if direct import orders were cancelled and rebooked as U.S. delivered product to avoid potential tariffs paid by retailers,” Conder wrote.

Whistleblower Resolution

Analysts expect the conclusion of Mattel’s whistleblower investigation relieves an overhang on shares. In fact, MKM attributes the surge in share price to the complaint resolution.

“Bulls were relieved the issue was far less severe than feared and the financial impact is non-cash,” Handler wrote. “Although the company did not draw a direct link, we believe news that CFO Joe Euteneuer will be stepping down after a transition period of up to 6-months is the most significant fallout from the complaint.”

The Ratings

• MKM maintained a Neutral rating and a $14 price target;
• Stifel maintained a Hold rating and a $13.50 target;
• UBS maintained a Neutral rating and $10 target; and
• Wells Fargo maintained an Overweight rating and a $17 target.

“We were encouraged by solid performances across key brands, along with operational improvement as the company makes further progress around its structural simplification plan,” Crum and Pang wrote.

Price Action

At time of publication, Mattel shares were up 21.2% at $12.80.

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