Analyst Note| Jaime M. Katz, CFA |
We plan to raise our $23 fair value estimate by about $1 after incorporating narrow-moat Mattel’s third-quarter results and updated outlook for the full year. This should render shares modestly undervalued after a 5% pop post print. Third-quarter sales grew 8% to $1.76 billion, double the 4% we expected, with Barbie sales rising 4%, Hot Wheels up 5%, and the challenger categories (action figures, building sets, games, plush) clocking 26% growth. Although the adjusted operating margin contracted 180 basis points versus the year ago period (to 22.8%), it still more than 1,100 basis points above the 2019 third quarter. The Optimizing for Growth initiative has removed significant costs from the operating structure already, as evidenced by the selling and administrative expense ratio that continues to contract; for the third quarter the ratio fell 178 basis points to 18.4%, and the ratio is expected to be more than 400 basis points lower than 2018 levels by year end (by our math). However, the cost of goods sold metric is unlikely to fare as well as operating expenses, given the 350 basis points of input cost inflation Mattel saw in the third quarter—which led to an adjusted gross margin of 47.8% (down 280 basis points).