Spin Master: Solid Products and Marketing Should Bolster Toy Sales in an Uncertain Environment

Shares of no-moat Spin Master have fallen 15% year to date, significantly underperforming the Morningstar US Mid Cap Index's 5% increase. We think shares are significantly undervalued, trading at more than a 30% discount to our CAD 43.50 fair value estimate. Our fair value estimate is based on average sales growth of 5% over the next 10 years, including acquisitions, and an adjusted EBITDA margin consistently above 20. Near-term risk largely stems from a cautious consumer environment, as we remain concerned that wholesalers and retailers will have to lean on more promotion to convert sales, crimping near-term operating margin leverage, a phenomenon we believe should be transitory.