As we look ahead to Black Friday this week, and the kick off of holiday selling season, I am spotting a solid trading opportunity in Mattel (MAT).
This weekend, I visited the American Girl Place store in Manhattan with my two daughters. American Girl is a case study in what is known as a brand franchise. You will never see a brand that so enthralls its target market.
Despite the strength of the American Girl franchise, you cannot buy MAT on that alone. American Girl generates slightly under 10% of revenue, although I suspect the profit contribution is far higher, based on the price point (high) and captive distribution channel, meaning MAT does not sacrifice 50% of the sale price. The case for Mattel is the strength of the broad portfolio of toy franchises that are performing well.
Barbie is the company's bread and butter, of course, with slowly growing sales providing a foundation for newer franchises. Over the years, Mattel transformed Barbie from strictly a toy franchise into an entertainment business. The company has sold more than 100 million DVDs over the past decade and will continue to drive the business with both new movie titles and a new Web-based series.
To fuel growth, Mattel is able to acquire smartly. In fact, 50% of sales come from properties acquired over the years, including American Girl, Polly Pocket and Matchbox. The company may have hit a home run again with the recent acquisition of HIT Entertainment, whose main property is the Thomas and Friends train characters. Thomas complements other boy franchises such as Hot Wheels and Cars 2 toys.
Of particular interest is the momentum Mattel is gaining in a new home-grown property Monster High. This is a tween-targeted girl franchise combining character toys and entertainment. The brand is generating a lot of buzz in the trade, and generated $300 million in sales (at retail) over the past 12 months. This Christmas could be the breakout season for the brand, since Mattel has been in slow ramp mode with it to this point.
The momentum is not without some risks. The Fisher-Price division is posting sluggish results and new leadership is revamping the advertising strategy in the hope of reigniting growth by better appealing to Gen-Y moms. The company is also still in a protracted legal battle with MGA over the Bratz brand. MGA won a "Hail Mary" judgment to recover the brand and Mattel is at some risk of a judgment that could cost them a couple hundred million or more. But this would not threaten its existence, given their strong balance sheet with a billion in cash.
Considering Mattel's leadership position in their industry and the upcoming seasonally strong period, the stock is relatively cheap. The street is looking for $2.36 of EPS in 2012, or 12x earnings. Estimates have been rising and the historical multiple of over 14x means there is some leverage to generate gains both from earnings growth and revaluation upward. You also collect a 3.5% annual yield along the way. This is the sort of defensive upside potential that a European debacle should not be able to derail.
Even Kanani, the "American Girl of the Year", can get excited about that!