Mattel, Inc.
(NYSE: MAT)
Analyst Report
Geoff Munger
Student Managed Fund
MBA 2004
Sources
www.valueline.com
www.bloomberg.com
www.moneycentral.com
www.wsj.com
www.smartmoney.com
www.yahoo.com
www.cnn.com
www.ebay.com
www.global.factiva.com
http://research.thomsonib.com/gaportal/ga.asp
Date: 12/08/03 Sector: Consumer Discretionary Industry: Toys and Games
Business Summary
Mattel, Inc. designs, manufactures and markets various toy products
worldwide through sales to retailers and directly to consumers. The
Company's portfolio of brands and products include girls, boys'
entertainment and infant and preschool. Mattel's segments are divided
on a geographic basis between domestic and international. The
domestic segment was further divided into United States girls (US
Girls), United States boys' entertainment (US Boys-Entertainment) and
United States infant and preschool (US Infant & Preschool). In
February 2003, Mattel announced the consolidation of its US Girls and
US Boys-Entertainment segments into one segment, Mattel Brands. In
addition, Pleasant Company, which was previously part of the US Girls
segment, is now a separate segment for management reporting purposes
in 2003.
Share Performance
Price ($): 19.46
52 Week High: 23.20
Currency: USD
Volume (millions): 1.797
52 Week Low: 18.57
5-year Price History
Financial Summary
Mattel, Inc.
(NYSE)
33 Continental Blvd.
El Segundo, CA
90245-5012
USA
http://www.mattel.com
NYSE: MAT
P/E
17.0
Employees
25,000
Shares
429.9
million
Market Cap
$ 8.37
billion
Value line
Beta
.70
Timeliness
3
Safety
3
Technical
4
Financial
B++
Strength
Industry
52 of 98
Ranking
Analyst Rating
Zack’s
Hold
Moneycentral
Hold
Charles
C
Schwab
Standard &
Hold
Poors
RECOMMENDATION:
rd
3 quarter revenues were $1.7 billion, a 2.1% increase over the same
quarter 2002. Net income for the 3rd quarter was down by 3.9% from
3rd quarter 2002, to $270 million.
Annual dividend increased from $.05 to $.40 on 12/04/03.
Share buyback program of $500 million currently ongoing.
BUY
# of shares: 750
Share Price: 19.36
Stop Loss: 15.50 (-20%)
Company Overview
Mattel, Inc., formed in 1945, has articulated its overall company vision to be “The World’s
Premier Toy Brands – Today and Tomorrow.” Those brands include such well-known and
established names as Barbie, Matchbox, Hot Wheels, Tyco Radio-Controlled Vehicles, and
Fisher Price.

Market share
o Mattel is the market share leader in the recreational products industry with a
16.4% share. The second largest company in that industry is Harley Davidson,
with a 16.1% share, while the largest direct competitor of Mattel’s is Hasbro, with
a 10.2% share.

Philosophy
o “The World’s Premier Toy Brands – Today and Tomorrow”

Business Model
o Strong product design and development group
o Regular refreshing, redesign, and extension of toy product lines
o Regular development of innovative new toy product lines for all segments
o 5 Key Company Strategies
- Improve execution of the existing toy business
- Globalize brands
- Extend brands
- Catch new trends
- Develop people
SIGNIFICANT TRENDS
Mattel has improved its performance over the past two years, despite a poor market and weak
consumer confidence, by strengthening its core brand momentum, executing its financial
realignment plan, improving supply chain performance, and developing people. By focusing on
these priorities, Mattel achieved, among other results, improvement in inventory levels, higher
gross margins and lower costs through management of the supply chain, improved development
of employee talent through the introduction of several new programs and a better alignment of
employee activity with Mattel's values.
In addition, Mattel has continued to focus on the globalization of its brands, which represented
approximately 36% of total consolidated gross sales in 2002. The following chart exhibits the
four regions that generated these international sales:
International Sales
9%
7%
24%
Europe
60%
Latin America
Canada
Asia Pacific
The past five years have seen also some significant events within the company, and based on its
response to those events, Mattel appears poised to resume a trend of strong growth in the coming
years.
During the third quarter of 2000, Mattel announced a financial realignment plan designed to
improve gross margin, selling and administrative expenses, operating income, and cash flows.
That plan, which had a three-year duration, is coming to a close with Mattel on track to deliver at
least the targeted initial cumulative pre-tax cost savings of approximately $200 million over
those three years. The restructuring plan should be kept in mind when evaluating the financial
analysis presented throughout this report.
Another significant event from which Mattel is still adjusting from the effects of was its May,
1999 merger with the Learning Company. Following the merger, Mattel’s Consumer Software
segment, which was comprised primarily of Learning Company, experienced substantial losses.
That segment was subsequently reported as a discontinued operation, effective March 31, 2000.
After the October 1999 announcement of the expected results of the Learning Company division,
Mattel faced a number of class action complaints filed by its stockholders which claimed that
Mattel’s officers had made false and misleading statements which induced the stockholders to
vote for the merger. The lawsuits were settled in November of 2002, with the total amount that
Mattel expects to incur in connection with the Learning Company litigation at $25.4 million on a
pre-tax basis. Again, the analysis in this report should be viewed in light of the losses from the
Learning Company’s Consumer Software segment and the resulting litigation.
Competition
Company
Ticker
Market Cap
Beta
Revenues
Mattel, Inc.
MAT
$8.37 B
.70
$4,888 M
Year of
Incorporation
1945
Hasbro, Inc.
HAS
$3.64 B
.90
$3,012 M
1923
LF
$1.65 B
1.8
$597 M
1995
Leapfrog
Enterprises, Inc.
Hasbro, Inc. and Leapfrog Enterprises, Inc. are the two companies to which I will compare
Mattel throughout this report. Hasbro is an established competitor which functions primarily in
the toys and games areas for both children and families. It designs, manufactures and markets
games and toys ranging from traditional to high-tech. Some of Hasbro’s most well-known
brands are Playskool, Tonka, Milton Bradley and Parker Brothers. Leapfrog, on the other hand,
is a young company which designs, develops and markets technology-based educational products
and related proprietary content. It focuses on helping preschool through eighth-grade children
learn age- and skill-appropriate subject matter, such as phonics, reading, spelling, math, science,
geography, history and music. Both Hasbro and Leapfrog are very different from the other, and
thereby each gives different insight as to Mattel’s performance relative to both a similar,
established competitor and a young, rapidly growing, technology-focused company.
2-year Cumulative Returns
1-year Cumulative Returns
The above graphs show that the cumulative returns for Mattel over the past two years have been
relatively flat, with little volatility. These charts should be used as a reference when examining
the subsequent analysis in this report, as it is valuable to note that the performance of the
company has been improving despite the flat returns on the stock. Should Mattel continue to
show positive effects from its financial restructuring, the market is likely to respond well to the
company’s stock.
RECENT NEWS
Mattel, Inc. Announces Additional Share Repurchase Authorization
November 21, 2003
Mattel, Inc. announced that the Mattel Board of Directors has authorized the Company to
increase its previously announced $250 million share repurchase program by an additional $250
million. As of today, Mattel has repurchased 12.7 million shares of common stock for an
aggregate of $244.5 million under this program. Repurchases will take place from time to time,
depending on market conditions.
Mattel, Inc. Announces Court Orders Immediate Stop to Simba Toys' 'My Style' Products
October 30, 2003
Mattel, Inc. announced that it has obtained a ground-breaking European Union-wide decision
against Simba Toys for selling products that copy Mattel's My Scene range of dolls. The High
Court of Justice in London has ordered Simba Toys to stop manufacturing, distributing and
selling products sold under the name "My Style" in the European Union, and further ordered
Simba to request the return of these products from retailers and its other customers. The High
Court declared that Mattel has Community Design rights in its My Scene range of dolls, and that
Simba infringed upon those rights by copying Mattel's design.
Mattel, Inc. Announces $250 Million Share Repurchase Program
July 21, 2003
Mattel, Inc. announced that the Mattel Board of Directors has approved a share repurchase
program of up to $250 million. Repurchases will take place from time to time, depending on
market conditions. The share repurchase program is one part of the Company's capital and
investment framework, which was announced in February of this year.
Growth Trends: Is it a good company?
Revenues and Net Income
Net Income
Revenue
600
6000
400
4000
200
2000
0
-200
0
1998
1999
2000
2001
2002
1998
1999
2000
2001
2002
Revenues dipped slightly in 2000 but have begun to grow again over the past three years. More
striking is the dramatic change in Net Income in 1999, the same year in which Mattel posted its
highest revenues of the past five years. The loss was the result of the subsequently discontinued
Consumer Software segment of the Learning Company merger. The following year, Mattel
introduced its financial realignment plan, which appears to have been having a positive effect as
Mattel’s net income has risen steadily despite only small gains in revenue. Also important to
note were the poor economic conditions faced by the entire industry during 2001 and 2002. The
recent upturn in the economy and consumer spending, leading into the holiday season, could
spell significant gains for Mattel in fiscal 2003.
Net Profit Margin
Mattel’s net profit margin, shown in the chart below, has been higher than the industry over the
past year, and significantly higher than its largest competitor, Hasbro. The five-year trend in net
profit margin matches the trend of net income, and can be explained by the same factors.
Net Profit Margin
Latest 12-month period
Net Profit Margin
10
15.00%
8
6
10.00%
4
2
5.00%
0
0.00%
-2
MAT
Industry
HAS
LF
1998
1999
2000
2001
2002
Earnings Per Share
MATTEL - EPS
Estimated Earnings Grow th
1.4
25.00%
1.2
1
20.00%
0.8
15.00%
0.6
10.00%
0.4
c
5.00%
0.2
0.00%
0
1999
2000
2001
2002
2003
MAT
Industry
HAS
LF
Earnings per share have been increasing steadily.
Mattel’s projected earnings growth, at
11.50%, is only slightly higher than that of Hasbro, and significantly lower than that of Leapfrog,
but it is still well ahead of the industry. Leapfrog’s higher growth is both a function of the fact
that it is a younger, higher-growth company and a riskier company.
Free Cash Flow
Free Cash Flow is the measure of cash available from the company’s business operations, after
the payment of interest and taxes, for distribution of dividends or for reinvestment in the
business. After taking a hit in
Free Cash Flow
1999 and 2000, due to expenses
and losses associated with the
1500
Learning Company merger and
1000
its Consumer Software segment,
500
FCF has been on the rise, with
0
Mattel consciously implementing
-500
cost-cutting measures in a bid to
1998
1999
2000
2001
2002
increase their year-end available
cash. One of those measures was
the reduction in annual dividend, from $.36 per share in 2000 to $.05 per share in 2001, which is
shown below
Dividend per share
Dividend Yield vs. Industry
Dividend per Share
3.00%
0.4
2.50%
0.3
2.00%
0.2
0.1
0
1.50%
MAT
1.00%
Industry
0.50%
1994
1996
1998
2000
2002
0.00%
1999
2000
2001
2002
DPS was increasing steadily until the time Mattel’s financial realignment. At that point, Mattel’s
management made the decision to decrease its dividend drastically as part of its cost-cutting
measures. The reduction in DPS resulted in savings of approximately $135 million in 2002 and
$132 million in 2001. Mattel just announced that it has increased its annual dividend to $.40,
which it paid out on December 4, 2003.
Financial Health
Debt/Equity Ratio and Interest Coverage
Interest Coverage
Debt/Equity Ratio
10
0.8
8
0.6
6
0.4
4
0.2
2
0
0
MAT
Industry
HAS
LF
MAT
Industry
HAS
LF
Mattel has a continuing goal of a debt/equity ratio of 0.25. Its current debt/equity ratio is 0.27,
while its interest coverage is 9.2. In comparison with its next-largest direct competitor, Hasbro,
these numbers show that Mattel is not nearly as leveraged but, as a result, also not nearly as
risky. In the consumer discretionary sector, and specifically in the toys and games industry,
revenues are very subject to underlying economic factors. When consumer spending decreases,
leisure items are one of the first products to suffer. Thus, it would seem likely that Mattel’s
higher interest coverage is directly related to its lower level of debt. Mattel is a very liquid
company which could probably afford to take on a higher level of debt, but considering that it
has generated spread (ROIC – WACC) of 2.28%, greater leverage might not be worth the risk
involved.
Management Performance
Return on Equity (ROE) and Return on Assets (ROA)
.
ROE and ROA
0.3
0.2
ROE
0.1
ROA
0
-0.1
1999
2000
2001
2002
ROE vs. Industry
ROA vs. Industry
30
15
20
10
10
5
0
0
MAT
Industry
HAS
LF
MAT
Industry
HAS
LF
Mattel’s ROE is showing strong growth since 2000, outpacing even the young and more rapidlygrowing Leapfrog Enterprises over the past 12 months. The losses incurred from the Learning
Company merger hurt Mattel’s management performance ratios (to the point where the merger
itself was the downfall of Mattel’s then-CEO), but the recovery in those ratios is consistent with
the company’s overall recovery from that failed endeavor.
Return on Invested Capital (ROIC)
The ROIC for Mattel in 2002 was 17.2%, while the industry average ROIC was just 10.7%.
Economic Value Added
In
the
year
ending
2002,
the
invested
capital
for
MAT
was
$3,570,271,000
(http://global.factiva.com). The weighted average cost of capital (WACC), as calculated in the
following section, is 6.68%.
Economic Value Added = (ROIC – WACC) x Invested Capital
= (17.2% - 6.68%) x $3,570,271,000 = $375.6 million
Market Multiples
P/E Ratio
P/E ratio
MAT
Industry
HAS
LF
16.9
23.1
22.9
23.0
P/E Ratio
P/E Ratio vs. Industry
25
25
20
20
15
15
MAT
10
10
Industry
5
5
0
MAT
Industry
HAS
0
LF
2000
2001
2002
A very positive sign for Mattel’s stock its P/E ratio has consistently been lower than that of the
industry. While this might indicate that investors are wary about the company’s potential for
future growth, this is less likely for an established industry leader which has been in business
since 1945. More probably is that the stock is underpriced relative to the company’s current
level of earnings, which can be understood in the context of investor wariness about the success
of Mattel’s turnaround after its tumultuous turn-of-the-century results. I believe that Mattel has
had enough time to demonstrate that its recovery is legitimate, and that the market will soon see
(with a little help from an improved consumer economy) that the stock is a bargain at its current
price.
P/S
P/S
MAT
Industry
HAS
LF
1.69
1.61
1.17
2.73
The price/sales ratio is high relative to the industry and Mattel’s most comparable competitor,
Hasbro. When viewed in the context of Mattel’s net profit and revenues over the past three
years, however, one can see that Mattel has become much more efficient in generating increased
profits without correlating increases in the level of sales. Therefore, it makes sense that a
company like Hasbro, which has not had the same recent efficiency in creating margin as Mattel,
would need a higher level of sales relative to its price in order to turn a profit.
PEG
PEG = P/E ratio /Annual EPS growth
PEG
MAT
Industry
HAS
LF
1.33
2.44
1.63
1.07
The PEG ratio is 1.33 for Mattel, which is much lower than that of its industry. This could be an
indicator that the investors expect the EPS growth to be much higher than the street consensus
number. Leapfrog’s lower PEG ratio is a function of its higher EPS growth, which is in turn
related to the fact that it is still in its rapid growth phase.
Capital Structure
Mattel’s capital structure is 92.47% equity. There is no preferred stock.
Equity Capital Structure
Debt Capital Structure
Market Capitalization = $8.37 B
Short-term debt = $207.5 M
Preferred equity = 0
Long-term debt = $640.1 M
Common Weight = 100%
Short Debt Weight = .51%
Preferred Weight = 0%
Long Debt Weight = 7.02%
CAPM
Rf = risk-free rate = 5 year treasury bond rate = 3.375%
Rm - Rf = historical long term equity risk premium = 5.00%
Cost of Equity = 3.375 + .7(5) = 6.875
WACC
Debt
Common Equity
Preferred Equity
Weight (%)
7.53
92.47
0
Cost (%)
4.35
6.875
0
Wtd. Avg.
0.00326
0.06357
0
WACC
6.68%
Stock Valuation: Is it a good stock?
Average Annual Compound Growth Rates
10-year EPS growth
3.98%
4-year EPS growth
32.30%
10-year DPS growth
12.79%
Earnings growth fell drastically with the heavy losses incurred after the Learning Company
merger in 1999, and thus the lower 10-year growth rate. Over the shorter term, however – and
notable because of the ongoing financial restructuring of Mattel – earnings have grown at a rate
of greater than 30%. While that level might not be sustained, it paints a far more accurate picture
than the 10-year growth rate.
Dividends, on the other hand, are more accurately expressed with the full 10-year growth rate
because of the low dividends paid out in 2001 and 2002 during the cost-saving phase of the
realignment.
Average Plowback, Payout, and ROE (10-year)
Average Payout
26.38%
Average Plowback
73.62%
Average ROE
22.99%
Growth Rate
10-year EPS
3.98%
10-year DPS
12.79%
ROE/b
16.93%
Average of 3 growth rates
11.23%
Because each of the growth rates above differed from the others, I took the average of the three
methods (EPS, DPS, and ROE/b) to arrive at an average annual growth rate of 11.23%.
Gordon Constant Dividend Growth Model
Dividend
0.4
0.4
0.4
0.4
0.4
g
1.1123
1.1123
1.1123
1.1123
1.1123
n years
1
2
3
4
5
Div.
Price
0.445
0.495
0.550
0.612
0.681
total =
Year
PV
$0.42
$0.43
$0.45
$0.47
$0.49
$2.27
2003
2004
2005
2006
2007
2008
Price at t=5
PV of Dividends
$2.27
PV of price at t=5
$30.41
Projected Price
$32.68
PV
$19.46
$21.65
$24.08
$26.78
$29.79
$30.41
$42.06
BUY
P/E Valuation Model
Avg. P/E
Projected Earnings 2004
Projected Price
19.26
BUY
1.40
26.96
Mattel is currently trading at less than $20. Thus, both the Gordon Model and the P/E Model
imply that the stock is undervalued. Even if the growth rate of the Gordon Model is adjusted
significantly downward, to 3.98% (the 10-year average EPS growth, which I argued above is not
an accurate indicator), the resulting stock price is $23.56. It therefore appears that Mattel’s stock
is currently undervalued.
ValuePro.net
ValuePro.net calculates an intrinsic stock value of $24.43 (this with conservative estimates in the
model – ValuePro’s standard settings calculated the intrinsic value at $40.95.
Stock Rankings
BUY
Timeliness
Valueline
Safety
3
3
Technical
Beta
4
1.20
MoneyCentral StockScouter Rating:
7
MoneyCentral Average Analyst Recommendation:
Hold
Yahoo!Finance Average Analyst Recommendation:
Hold
I would strongly recommend buying Mattel at this time. The fact that analysts are not listing it
as either a buy or a strong buy only reinforces that decision. Simply put, once the analysts
upgrade their recommendations, everyone with internet access can read the same thing. For that
reason, decisions based on analyst ‘buy’ ratings are reactive, not proactive. Mattel is currently
trading near its 52-week low, its intrinsic value under a number of different models shows it as
undervalued, and the market has not yet reacted to the positive signs being shown from Mattel’s
financial realignment. Mattel is a strong company with a strong history and a leadership position
in the toys and games industry. Now is the perfect time to buy, rather than waiting to react until
after the time that the rest of the market recognizes Mattel’s true value.
Risk Analysis
Insider Trading
There have been no insider trades within the past 6 months.
# shares outstanding
450 Million
% owned by insiders
2.25
# sold in the past 6 months
0
# purchased by insider
shareholders in the past 6
months
0
Risk Factors

Competition and New Product Introductions
o Mattel's business and operating results depend largely upon the appeal of its toy
products.

Seasonality, Managing Production and Predictability of Orders

Adverse General Economic Conditions

Customer Concentration
o A small number of Mattel's customers account for a large share of net sales.
o Wal-Mart, Toys ‘R Us, and Target accounted for 50% of all sales in 2002.

Rationalization of Mass Market Retail Channel and Bankruptcy of Key Customers

Adequate Supplies and Cost Increases

Litigation and Disputes

Protection of Intellectual Property Rights

Political Developments, including Trade Relations, and the Threat or

Occurrence of War or Terrorist Activities

Manufacturing Risk

Financing Matters

Acquisition, Dispositions and Takeover Defenses

Foreign Currency Risk
The Company Board: 8 of 11 Directors appear to be independent.
Name
Occupation
Independent
Eugene P. Beard
Vice Chairman, Finance and Operations (retired),
Employee/Advisor, The Interpublic Group of Companies, Inc.
(also a Director of Brown Brothers Harriman 59 Wall Street
Fund, Bessemer Trust Company, Old Westbury Funds and Sand
Hill Partners Fund II)
No
Dr. Harold Brown
Managing Director and Senior Advisor, Warburg Pincus LLC;
Counselor, Center for Strategic and International Studies (also a
Yes
Director of Altria, Inc. and Evergreen Holdings, Inc.)
Robert A. Eckert
Tully M. Friedman
Ronald M. Loeb
Dr. Andrea L. Rich
William D. Rollnick
Christopher A.
Sinclair
G. Craig Sullivan
John L. Vogelstein
Kathy Brittain White
Chairman of the Board and Chief Executive Officer of Mattel
Chairman and Chief Executive Officer, Friedman Fleischer &
Lowe, LLC, a private investment firm (also a Director of Levi
Strauss & Co., McKesson Corporation, The Clorox Company,
Archimedes Technology Group and Capital Source Holdings
LLC)
Senior Vice President and General Counsel, Williams-Sonoma,
Inc.
President, Chief Executive Officer and Director, Los Angeles
County Museum of Art
Former Chairman of the Board of Mattel; Retired Chairman and
a Director of Genstar Rental Electronics, Inc.
Managing Director, Manticore Partners, LLC and Chairman,
Scandent Group, Netherlands, B.V. (also a Director of Merisant,
Inc. and Footlocker Inc.)
Chairman and Chief Executive Officer, The Clorox Company
(also a Director of Levi Strauss & Co.)
Vice Chairman and Member, Warburg Pincus LLC (also a
Director of Journal Register Company and Information Holdings
Inc.)
Executive Vice President, e-business and Chief Information
Officer, Cardinal Health, Inc. (retired); Founder and President,
Horizon Institute of Technology (also a Director of Certegy, Inc.
(formerly Equifax Payment Services))
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes