New Plan for Mattel an Improvement

Narrow-moat

We don’t plan to make any material change to our $31 fair value estimate, which is contingent on Mattel achieving revenue growth of 3% in 2017 (in line with the revised 2017 low-single-digit sales guidance, lowered from a mid-single-digit expectation at the end of the first quarter) and long-term sales increases that average 3% over our 10-year explicit forecast, below the company’s expectation for mid to high-single-digit revenue growth. Further, our valuation anticipates the company can reach more than 15% operating margins, but not until 2021, when we project operating margins of 15.2%.

We’ve taken a more tempered outlook on the firm’s top-line potential for two reasons. First, with 40% of the revenue stream coming from international markets, total sales (and gross margin) could continue to swing wildly in periods of excess foreign exchange volatility. Second, while China and emerging markets (Asia-Pacific and Latin America represented 19% of 2016 sales) are important drivers of revenue growth, North America (60%) remains a significant contributor to sales and profitability, but remains a mature market that is likely to deliver just low-single-digit growth rate on average. Furthermore, given that U.S. consumers spend $450 annually per child on toys, versus China’s mere $50 spend per child on toys, the emerging-markets focus implies customer acquisition will have to occur at a rapid clip in order to displace the slower steady rate growth of the U.S. market (particularly in markets where consumers spend well below China’s rate).

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