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 the 5 Most Undervalued Companies for the Defensive Investor – January 2015. 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. In May 2014, the Company, through its subsidiary, acquired MEGA Brands Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7
- 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 – PASS
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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$29.44|
|Value Based on 0% Growth||$17.26|
|Market Implied Growth Rate||2.70%|
|Net Current Asset Value (NCAV)||-$1.73|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Mattel Inc. qualifies for both the Defensive Investor and the Enterprising Investor after satisfying all of both investor types’ requirements, which is a rare accomplishment. Neither investor type will have any initial concerns about the financial position of the company. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.52 in 2010 to $2.03 for 2014. This level of demonstrated growth supports the market’s implied estimate of 2.7% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.
Be sure to check out previous ModernGraham valuations of Mattel Inc. (MAT) for greater perspective!
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.
Disclaimer: The author did not hold a position in Mattel Inc. (MAT) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.