Stock Analysis: MAT

Founded in 1945 and headquartered in El Segundo, CA., Mattel Inc. (MAT) is the world's largest manufacturer of toys and games. The company makes toys under the brands Mattel, American Girl, Barbie, Batman, Dora the Explorer, Fisher Price, Hot Wheels, Matchbox, Sesame Street, View-Master, Winnie the Pooh, Yu-Gi-Oh, and many more. The company sells directly to retailers and wholesalers, and through agents and distributors in countries where it has no direct presence.

MAT is a Dividend Challenger with 5 consecutive years of dividend increases. The company's 5-year compound annual growth rate (CAGR) is 13.9%. It pays quarterly dividends of $0.38 per share in the months of March, June, September, and December. At the current price of $35.10, MAT yields an impressive 4.33%.

From September 2009 through December 2013, MAT outperformed the S&P 500 by a healthy margin, reaching an all-time high of $47.94. Since January 2014, however, MAT is one of the worst performing stocks in the S&P 500. The stock price has dropped 26.8% so far this year. 

Analysis of MAT

MAT trades at a discount of about 7.7% to my fair value estimate of $37.15. For comparison, MorningStar's fair value estimate is $39.00 and S&P Capital IQ's fair value estimate is $35.30.

The following table provides some key statistics:

I use several selection criteria to choose candidate dividend growth stocks. MAT passes the following of my selection criteria:

• A streak of at least 5 years of dividend increases (5 years)
• Dividend yield exceeds 2.75% (4.33%)
• Chowder rule: Dividend yield plus 5-year CAGR exceeds 12% (18.34%)
• Price to earnings ratio (P/E) is less than 20 (TTM 14.87x and Forward 13.54x)
• 5-year CAGR is at least 10% (13.94%)
• Price discount is at least 5% of fair value estimate (7.71%)

MAT fails the following of my selection criteria:

• Earnings per share (EPS) percentage payout is less than 40% (65.62%)
• Debt to Equity ratio is below 50% (72%)
• P/E to annual EPS growth (PEG) ratio is less than 2 (2.61)
• Reasonable confidence in continued dividend growth (No)

Based on these statistics, MAT earns 5 out of a possible 7 stars: (*****--)

Other ratings for MAT

S&P Capital IQ Stock Report   (**---) Sell   Thomson Reuters StockReport+    4/10 Neutral   MorningStar Rating  (****-)  The Motley Fool's CAPS Rating  (****-)  Zacks Rating  5 Strong Sell

Concluding Remarks

MAT is the top candidate in the Consumer Discretionary sector on my September dashboard of dividend growth candidates. It has an attractive dividend yield and a strong 5-year CAGR.

There are several other reasons to like the stock. With such well-known brands as Barbie, Hot Wheels, American Girl and Fisher Price, MAT has exceptional brand recognition. The company has partnered with several entertainment partners, allowing film-based toys to be produced for hit films including Toy Story, Cars, and Batman. MAT is competitively valued at only 14 times trailing earnings per share. This compares favorably to the valuation of close rival Hasbro, Inc. (HAS), which trades at 20 times trailing earnings.

Unfortunately, I believe there are more compelling reasons not to buy MAT.

The excellent dividend yield and growth numbers mean nothing if MAT cannot continue to grow revenue. In the first half of 2014, MAT reported revenues of $2 billion, down nearly 8% year over year. EPS was $0 compared with $0.32 during the same period last year. The dismal results caused the stock price to plummet.

Often, insiders and institutional buyers step in to buy shares of a declining stock. If fundamentals are strong and value is evident, bargain basement prices will be very attractive. In MAT's case, though, the opposite seems to be happening. Large amounts of insider and institutional shareholder selling is taking place.

Some of MAT's challenges come from rising competition and from digital entertainment. HAS and the privately-held Danish company, Lego, are major competitors. HAS grew sales in the first half of 2014 by 5.5% to $1.51 billion. And, just a few days ago, Lego announced that its revenue in the first six months of 2014 rose 11% to $2.03 billion, surpassing MAT's sales for the first time. The revenue growth of Lego and HAS comes despite growing challenges in the toy business, as children increasingly gravitate towards game consoles, tablets and other mobile devices and away from toys and board games.

I'd like to see evidence that MAT can start growing earnings again and that strategic plans are in place to sustain that growth. Until that happens, I'm not interested in buying shares of MAT.

Full Disclosure: I don't own any shares of MAT and I'm not planning on buying any shares soon.