Mattel Is losing Ground Due to New Trends and Higher Competition

In this article, let's take a look at Mattel Inc.(MAT, Financial), a $7.65 billion market cap toy company whose successful brands and products include Barbie dolls, Fisher-Price toys, American Girl dolls and books and Hot Wheels.

Current patterns

The company is one of the largest players in the toy industry, having approximately a 20% market share in the U.S. toy industry. This industry has changed at a faster rate. Mattel's strategy consist on develop its core brands through new popular toys. Children move away from traditional toys at younger ages. They like more sophisticated products so the company must update on a permanent basis. Further, the firm has licensing arrangements and partnerships in order to expand its portfolio of brands into the non-traditional toys market. The acquisition of Mega Brands should contribute to expansion into new franchises and help boost revenues in the upcoming future.

The company also faces strong competition from new competitors. The new era of digital toy manufacturers develops new entertainment offerings, such as video games and consumer electronic products.

Revenues, margins and profitability

Looking at profitability, revenues declined by 5.65% and led earnings per share decreased in the fourth quarter compared to the same quarter a year ago ($0.44 vs $1.07). The net income has decreased by 59.4%, a huge amount when compared to the same quarter one year prior, to $149.93 million from $369.25 million.

The net margin for the company is considered rather high, at 8.52%, which is ranked higher than 80% of the 1,016 Companies in the Global Leisure industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 16.28% which is higher than the industry median and the one obtained by Callaway Golf (ELY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Sturm Ruger & Company (RGR, Financial) and Hasbro (HAS, Financial) could be the options. For investors looking at a greater ratio, Polaris Industries Inc. (PII, Financial) is the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.5x, trading at a discount compared to an average of 35.2x for the industry. To use another metric, its price-to-book ratio of 2.60x indicates a premium versus the industry average of 2.40x while the price-to-sales ratio of 1.28x is above the industry average of 1.86x.

$10K invested 5 years ago

The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $12,562, which represents a 4.7% compound annual growth rate (CAGR).

Final comment

As outlined in the article, the company´s size allows it to lunch new products and make strategic moves like acquisitions. Further, it can expand into high-growth emerging markets, such as Brazil, Russia, India or China.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund guru James Barrow (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) opened new positions in the stock, with 16,098 and 456,406 shares respectively. Other hedge fund managers like Sarah Ketterer (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Brian Rogers (Trades, Portfolio) have added this stock to their portfolios in the fourth quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned