Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Low PEmg Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Mattel Inc. (MAT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Mattel, Inc. (Mattel) designs, manufactures and markets a variety of toy products worldwide which are sold to its customers and directly to consumers. Mattel’s portfolio of brands and products are grouped in categories, such as Mattel Girls & Boys Brands, including Barbie fashion dolls and accessories (Barbie), Polly Pocket, Little Mommy, Disney Classics, and Monster High (collectively Other Girls Brands), Hot Wheels, Matchbox, and Tyco R/C vehicles and play sets, and CARS, Radica, Toy Story, Max Steel, WWE Wrestling, and Batman, and games and puzzles; Fisher-Price Brands-including Fisher-Price, Little People, BabyGear, Imaginext, and View-Master, Dora the Explorer, Go Diego Go!, Thomas and Friends, Mickey Mouse Clubhouse, Sing-a-ma-jigs, and See ‘N Say, and Power Wheels, and American Girl Brands, including My American Girl, the historical collection, and Bitty Baby. American Girl Brands products are sold directly to consumers via its catalogue, Website, and retail stores.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$32.68|
|Value Based on 0% Growth||$19.16|
|Market Implied Growth Rate||4.31%|
|Net Current Asset Value (NCAV)||$0.56|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Mattel Inc. is suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the only concern is the high PB ratio, while the company passes all of the requirements of the Enterprising Investor. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company including comparing the company to ModernGraham’s valuation of Hasbro Inc. (HAS) and ModernGraham’s valuation of The Walt Disney Company (DIS). From a valuation side of things, Hasbro appears significantly undervalued after growing its EPSmg (normalized earnings) from $1.35 in 2009 to $2.25 for 2013. This demonstrated level of growth is greater than the market’s implied estimate of 4.31% and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Mattel Inc. (MAT)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author held a long position in The Walt Disney Company (DIS) but did not hold a position in Mattel Inc. (MAT) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.