Even though Mattel (currently trading at $17.32 per share) has gained 13.6% over the last six months, it has lagged the S&P 500’s 22.9% return during that period. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Mattel, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Is Mattel Not Exciting?
We don't have much confidence in Mattel. Here are three reasons we avoid MAT and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Mattel grew its sales at a sluggish 4.5% compounded annual growth rate. This was below our standard for the consumer discretionary sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Mattel’s revenue to rise by 3.2%, close to its 4.5% annualized growth for the past five years. This projection is underwhelming and indicates its newer products and services will not accelerate its top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Mattel’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Mattel isn’t a terrible business, but it doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 10.8× forward P/E (or $17.32 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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