Can Someone Justify Mattel's Ludicrous Valuation?

I recently recommended shorting Mattel (MAT) as I was dumbfounded by the company’s valuation. Mattel is facing several headwinds, like the loss of Disney’s licensing deal and unfavorable foreign exchange rates, which have hurt the toy maker's earnings as well as sales. Mattel’s sales have been heading lower on a year over year basis and the company has also been losing money in order to curb the downfall.

Despite the aforementioned concerns, the market has priced Mattel as a growth stock. To put this into perspective, Mattel’s trailing P/E of 30 is almost the same as Google’s.
However, unlike Google, Mattel is losing money and its sales are shrinking.

All in all, given Mattel’s prospects, the valuation of the stock is ridiculous and in my opinion, it should be trading at least 40% lower. As a result, I think the stock is still a compelling short.

Bad earnings report

Mattel reported its Q1 results last month, missing the analysts’ estimates on earnings, but beating on revenue. Mattel’s top-line shrunk 6% year over year as its revenue came in at $869 million, beating the consensus by $8.3 million.

On the earnings front, Mattel reported a Q1 loss of -$0.13 per share, missing the analysts’ estimates by $0.06. In addition, if you listen to Mattel’s conference call, or read the transcript, you will notice that the tone of the management was very vague and pessimistic.

Despite all the bad earnings reports and several other concerns, Mattel is trading as a growth stock. However, analysts’ forecasts for Mattel’s growth do not justify its valuation at all. As per Yahoo! Finance, analysts are expecting Mattel’s revenue to shrink 2.7% this fiscal year whereas its EPS estimates for the next quarter have also gone down incredibly in the last 30 days.

While a 2.7% dip in revenue is not that bad, at Mattel’s valuation, a company should be posting double-digit revenue growth and should have good profit margins. Although the Forex concerns are expected to ease in the coming months, I don’t see Mattel trading at 30x P/E for a long time. Unless the company manages to grow its earnings tremendously in the near future, which is unlikely, Mattel will move towards the $20 mark soon.

Conclusion

At current levels, Mattel has about 30%-40% downside potential, thereby making the stock a compelling short. The toy maker will not be able to sustain its valuation for a long time and should head lower soon.
Published on May 18, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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