With Mattel adopting a new development strategy and updating its licenses, Maxim Manturov, Head of Investment Advice at Freedom Finance Europe, explores why these changes could make a positive impact on the company's growth potential.
Mattel is an American toy manufacturer with a global audience base and has one of the largest children and family entertainment franchises in the world. Children and parents around the world know Mattel by their iconic brands like Barbie, Hot Wheels, Monster High, and UNO. The company offers film and television content, gaming, music, and live events and operate in 35 locations.
Recently, Mattel acquired several new toy licences, including the right to produce Disney princess and Frozen toys. This, along with a new Barbie film being produced in partnership with Netflix and the implementation of a buyback programme, gives our analysts the firm belief that Mattel is a trademark of a share that investors will be able to capitalise on in the next year.
The basis for a potential stock price increase
1. Obtaining the rights to produce Disney princess and Frozen toys
Mattel's acquisition of the licences for Disney and Frozen is significant for investors. In 2016, Mattel lost Disney's licences which resulted in an estimated $440 million (£337.3m) in losses. With the reacquiring of the Disney licences, Mattel has assigned the team that successfully restored Barbie sales as the lead in developing Disney's toy business. Such valuable experience is likely to boost revenues from Mattel's key business - dollmaking. In fact, Q4 of 2021, showcased the gross billing for dolls being $804 million (£616.4m).
The company could also benefit from the upcoming Microsoft and Activision Blizzard deal. Mattel has a track record of successfully obtaining toy licences in collaboration with Microsoft, as well as with Lucasfilm, Pixar, Marvel, and others.
The recent success in the battle for the rights to Disney-inspired products has shown how determined Mattel is to regain the market. While figurines are not the company's most lucrative segment, the potential addition of Activision Blizzard's intellectual property-based products to the collab base could have a positive impact on revenue by increasing customer numbers.
2. The release of a new Barbie film
Mattel is creating a new Barbie film in partnership with Netflix. This new release could increase the target audience's interest in Mattel's products and increase merchandise sales. The share price could start to include potential gains from this direction at the same time as the official launch of the film's production, which is expected to premiere this summer.
3. Implementing a buyback programme
In February 2022, Mattel made an announcement that its short-term capital management objective was to implement a $200 million (£153.3m) share buyback, which is 2.5% of the current market capitalisation.
4. Financial Achievements at Mattel
Mattel's net sales stabilised and then accelerated, reaching 18% growth in constant currency in 2021. The lockdown during the pandemic seemed to motivate parents to find entertainment for their children beyond digital devices and toys came to the rescue. The affection for Mattel toys developed over these two years is expected to translate into increased purchases of similar toys by children and further drive sales in a positive direction. Mattel is once again starting to rapidly gain in popularity.
Although Mattel's adjusted gross margin of 48.2% was lower in 2021 due to high inflation for materials and transportation costs, Mattel was still able to increase its operating margin to 14% from 11.6% last year. This demonstrates the successful implementation of the company's internal restructuring announced in 2018 to reduce operating expenses as a percentage of revenue.
Adjusting EBITDA increased eight-fold to more than $1 billion (£766.5m) and the company's debt decreased. As a result, the leverage ratio has improved significantly in 2021. The company says the goal in the near term is to use free cash flow, which has increased by more than $650 million (£498.3m), to reduce debt and return to investment grade performance. All of this will provide Mattel with greater financial flexibility, access to additional liquidity, and a lower cost of capital.
When to invest
High-risk investors can find Mattel's entry share prices at $21.80 (£16.7); our analysts believe that within a year, Mattel could increase its growth potential by 37.6%, reaching a target price of $30 (£23).
Moody's Analytics, a software and tool developer in the capital market sector, helps with risk management, credit analysis, and economic research. Moody's has a rating system in which they assign grades to bonds and stocks based on the risk associated with any given investment. Recently, Moody's upgraded Mattel's rating from a Ba2 to a Ba1 as further evidence of Mattel's strengthened financial position. The rating is supported, among other things, by the company's status as one of the largest toy manufacturers in the world, its strong brand portfolio and good geographical diversification.
ENDS
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The company offers ongoing support, providing robust trading platforms and technologies for high-performance work on the market. Via its traders or by using the Freedom24 mobile trading platform investors can obtain direct access to the American and European stock markets.
Freedom Finance Europe Ltd. is registered in Cyprus on 05.08.2013 under registration number HE324220 and is regulated by the Cyprus Securities and Exchange Commission (CySEC) under licence number CIF 275/15, granted on 20.05.2015.
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