Mattel Inc. Quarterly Valuation – May 2015 $MAT

200px-Mattel-brand.svgRecently, multiple analysts have rated Mattel Inc. (MAT) as an intriguing company. Zachry Wang justifies a long position based on the company’s high dividend yield, consistent cash flows, and strong market share. FX Analyst expects the company to turn around its recent drop in earnings as consumer spending rises. Similarly, Matthew Waterman takes a very long-term view and argues investors should hold onto the company while it goes through a down cycle in earnings. These are all strong qualitative conclusions, and should be coupled with strong quantitative analysis in order to compare the opportunity to other possibilities.

Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits. Here is an updated look at how Yahoo fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

MAT Chart

MAT data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – PASS
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – Has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – Earnings per share has increased by at least 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period – FAIL
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – PASS
  7. 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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data

Recent Price $25.45
MG Value $14.23
MG Opinion Overvalued
Value Based on 3% Growth $25.19
Value Based on 0% Growth $14.77
Market Implied Growth Rate 3.07%
Net Current Asset Value (NCAV) -$2.50
PEmg 14.65
Current Ratio 3.26
PB Ratio 3.23

Balance Sheet – March 2015

Current Assets $2,595,000,000
Current Liabilities $795,000,000
Total Debt $2,100,000,000
Total Assets $6,107,000,000
Intangible Assets $2,108,000,000
Total Liabilities $3,440,000,000
Outstanding Shares 338,600,000

Earnings Per Share

2015 (estimate) $1.18
2014 $1.45
2013 $2.58
2012 $2.22
2011 $2.18
2010 $1.86
2009 $1.45
2008 $1.05
2007 $1.54
2006 $1.53
2005 $1.01

Earnings Per Share – ModernGraham

2015 (estimate) $1.74
2014 $2.03
2013 $2.23
2012 $1.96
2011 $1.76
2010 $1.52

Dividend History

MAT Dividend Chart

MAT Dividend data by YCharts


Mattel qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the insufficient earnings growth over the last ten years, and the Enterprising Investor is willing to overlook concerns with the level of debt relative to the net current assets and lack of growth over the last five years because the company satisfies the more conservative Defensive Investor. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has seen its EPSmg (normalized earnings) drop from $1.76 in 2011 to only an estimated $1.74 for 2015. This drop in EPSmg is particularly concerning because it demonstrates a trend in the earnings, as the EPSmg calculation takes five years of earnings figures into account. As a result, the company’s earnings appear to be in a downward spiral, and there must be a turn around before the valuation will improve. Interestingly, the market’s implied estimate for annual earnings growth is 3.07% over the next 7-10 years, so the market is expecting that turn-around even if the data doesn’t currently support that position.

In recent years, the company’s actual growth in EPSmg has drop an average of 0.2% annually, and due to this drop, the ModernGraham valuation model returns an estimate of intrinsic value well below the current price, indicating that the company is overvalued at the present time.

Disclaimer:  The author did not hold a position in any 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.







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