Summary
- After a strong third quarter, Mattel continues to see momentum and is now guiding for Q4 gross sales in constant currency to be approximately 5%.
- It continues to execute on becoming an IP-driven company.
- While we believe Mattel trades at our approximation of fair value, the company is still undervalued when compared to Hasbro.
We continue our coverage of Mattel (MAT). After a strong third quarter, the company continues to see momentum and is now guiding for Q4 gross sales in constant currency to be approximately 5%. For the full fiscal year, gross sales in constant currency are projected to be flat to plus 1%. That compares favorably to the gross sales decline of 13% during its first half, as the company was affected by retail closures and the defensive inventory position of many retail partners.
Mattel continues to execute on becoming an IP-driven company. The company has recently announced a new film project based on Thomas & Friends. Also, there are two new Masters of the Universe animated series in production and expected to be released on Netflix (NFLX) in the fall of 2021. To capitalize on the momentum and the re-introduction of the animated series to the public, Mattel is launching a new collector’s toy line. We believe the relaunch of this iconic series on NFLX to be a growth driver for the next fiscal year. To give some context, The Container Store (TCS) was featured on the release of The Home Edit show on Netflix in September. TCS is an exclusive partner with The Home Edit, and many products were shown during the airing. After the show released, TCS saw an increase in sales of approximately 17%. Although we cannot expect the same results, we believe a show on Netflix does create momentum, which Mattel can take advantage of. If the response to the release of Masters of the Universe is positive, new greenfield opportunities can be developed to grow the IP.
According to management, and per NPD data, the company gained market share in categories such as dolls, vehicles, and games & other:
Mattel was the #1 manufacturer in the third quarter in the U.S. and gained share throughout the quarter per NPD.
Source: Company Q3 conference call
Mattel reached our valuation target of $14 per share. While we believe it trades at our approximation of fair value, the company is still undervalued when compared to Hasbro (HAS) on an EV/sales basis. Currently, Mattel trades at 1.77x sales, while Hasbro fetches 3.12x.
The big discrepancy could be an opportunity for more gains in Mattel in the coming quarters. There is operating momentum behind the company, and opportunities for margin expansion as it continues its transition towards an IP-driven strategy. Mattel also wants to de-lever its balance sheet, which would reduce financial risk and could push the market to re-rate it at a multiple closer to Hasbro. Overall, we still feel bullish about the company.
