The narrow-moat firm's focus on driving demand for its products should help prevent incremental market share losses.
Over the past few years, Mattel
has struggled to create demand surrounding its products, ceding market share to other industry players that have been more focused on innovation, marketing, and more effectively addressing the evolution of children’s play patterns. Its inability to promptly respond to consumer trends also constrained operating margin performance under prior CEO Bryan Stockton, who held the top spot from 2012 to 2015. However, since CEO Christopher Sinclair and COO Richard Dickson took the reins in 2015, the priority has been on rebuilding the goodwill between Mattel’s legacy brands and consumers. We believe the focus now at narrow-moat Mattel to drive demand for its products (including brand purpose, innovation, consumer engagement, licensed partnerships, and commercial execution) should help prevent incremental market share losses.
Jaime Katz, CFA, is a senior equity analyst for Morningstar.
Performance of key brands, including Wheels and Fisher-Price (Core and Friends) and entertainment (53% of sales all together), has already begun to deliver solid and sustained constant currency results, indicating that new product relevance seems to be on the right track. We recently raised our fair value estimate to $33 per share from $32 as we expect improved cost leverage in the selling and administrative ratio next year, benefiting from higher sales (our forecast includes 6% revenue growth versus an average of 0% as reported over the past five years) thanks to the Cars 3 launch midyear. Lighter foreign exchange headwinds and a lower advertising ratio lead to about a 230-basis-point increase in operating margin to 13.5% in 2017 from 11.2% in 2016. With shares trading at a 15% discount to our fair value estimate and in 4-star territory, we view the stock as undervalued.
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