Mattel is a Compelling Short After Post-Earnings Pop
After having a bad 2015, shares of toy-maker Mattel (MAT) are off to a good start to 2016. Although the stock is flat YTD, shares of Mattel jumped over 10% today as the company shared better-than-expected quarterly results.Thanks in part to Barbie sales, Mattel saw some really good numbers, beating the analysts’ estimates on earnings as well as revenue. Q4 saw Barbie sales jump by 8% (on a constant currency), after years of sales declines. As a result, Mattel reported profits for the quarter of $215.2 million which translates to an EPS of $0.63 per share, beating the consensus by $0.06.
On the revenue front, sales came in at $2 billion, almost flat year over year, beating the analysts’ estimate by $90 million. While the results were great, I don’t think the pop in Mattel’s share price is justified. I think investors should use this post-earnings pop to short the stock as it possesses great downside potential. Here are a few reasons why I think Mattel is a short.
Pessimistic Conference Call
I think Mattel’s Q4 conference call was very pessimistic as the company’s management consistently warned about the headwinds it faces in the first half of FY 2016. The cautious stance of the management suggests that the company is facing some extreme headwinds and the stock could move much lower in the near future.
Strong dollar has already taken a toll on many companies and Mattel is no exception to it. The increasing strength of the U.S. dollar is a massive headwind for Mattel going forward.
After the post-earnings pop, Mattel is trading at over 33x trailing earnings and the valuation is absolutely ridiculous. Investors tend to get greedy when betting on a turnaround and Mattel’s current valuation has already priced in a successful turnaround. However, due to the macro headwinds and the loss of Disney Princesses, I think Mattel is far from a turnaround and will not be able to justify its valuation.
To put into perspective, Mattel’s valuation is almost equal to than that of high growth companies like Starbucks (SBUX) and Alphabet (GOOG)(GOOGL). Hence, I think the stock has not a lot of upside, and I have certain that it will head lower in the near future.
Given Mattel’s present valuation and the potential headwinds, I think the stock is headed much lower. Investors can benefit from the recent upsurge by initiating a short position in the stock.
Published on Feb 2, 2016By Ayush Singh