Mattel's Cost Controls Deliver Savings
By prioritizing inventory cleanup, the narrow-moat toymaker likely won't realize the full gains from its turnaround program as soon as originally expected.
Narrow-moat
Further, we see two uncertainties that could lead to some variance in Mattel’s performance over time. First, Mattel is reviewing the return on investment from manufacturing product internally; if it opted to outsource this production (like narrow-moat Hasbro), this could free up significant capital to reinvest to protect the brand intangible asset that underlies our narrow moat, which we would view favorably. Additionally, while a bit late to the content game, Mattel now intends to co-produce content, following Hasbro’s pursuit, altering the business economics depending on the project. The latter uncertainties remain longer-term in nature but could favorably alter the cash flow profile of the firm.
After accounting for each of these facets, as well as increased spend behind product development--raising terminal S&A to 23.3% from 22% of sales--as Mattel invests to support its brand intangible asset, we’ve adjusted our fair value estimate to $22.50 (down from $25.50). However, we still view shares as undervalued, trading at a 26% discount to our revised fair value estimate.
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