Shares of leading toymaker Mattel (MAT) are up in price marginally year-to-date, outperforming the benchmark indexes’ negative returns so far this year. Investors have been bullish about the company’s strategic business transformation and nearshoring efforts. However, with nearly $50 million in Capex recently, will the company be able to maintain its ROE in the near term? Read more to learn what we think.

Mattel, Inc. (MAT) in El Segundo, Calif., is a leading global toymaker and children’s entertainment company. Its popular products include Barbie, Hot Wheels, American Girl, and Polly Pocket. The company operates through three segments: North America; International; and American Girl. Furthermore, it has an ISS Governance QualityScore of 3, indicating relatively low governance risk.

Shares of MAT have gained 16.3% in price over the past six months and marginally year-to-date to close yesterday’s trading session at $21.95.

However, the stock has declined  2.3% over the past month, versus the benchmark S&P 500 index’s 6.8% gains over this period.

Here is what could shape MAT’s performance in the near term:

Nearshoring Efforts

Amid the continuing global supply chain disruptions, MAT has taken steps to relocate its supply chain closer to the United States. The company invested nearly $50 million to open a production plant in Mexico last month. This plant is by far the largest production hub for MAT, significantly larger than its hubs in China, Malaysia, and Vietnam. The inauguration of the new mega-factory  is in line with MAT’s strategic transformation and manufacturing footprint consolidation plans.

Regarding this, MAT Latin America Managing Director Gabriel Galvan said, “Being able to have product close to your consumer and not having to transport it from Asia, that’s going to be more profitable and more competitive when you take costs into account.”

Mixed Financials

MAT’s net sales improved 10% year-over-year to $1.79 billion in its fiscal fourth quarter, ended Dec.31, 2021. Its gross profit came in at $884.30 million, up 6% from the same period last year. However, its gross margin declined  210 basis points year-over-year to 49.3%, while its adjusted gross margin declined 220 basis points from the same period last year.

Its operating income and net income have risen 37% and 79%, respectively  from the prior-year quarter to $257.50 million and $225.80 million. Its EPS stood at $0.64, representing a 73% improvement from the year-ago value. Nevertheless, MAT’s cash and cash equivalents balance fell marginally year-over-year to $731.40 million for the year ended Dec. 31, 2021.

Consensus Rating and Price Target Indicate Potential Upside

Among the 11 Wall Street analysts that rated MAT, eight rated it Buy, while three rated it Hold. The 12-month median price target of $31.95 indicates a 45.6% potential upside from Friday’s closing price of $21.95. The price targets range from a low of $26.00 to a high of $45.00.

POWR Ratings Reflect Uncertainty

MAT has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

MAT has a C grade for Stability, Momentum, and Value. The stock’s relatively high 1.44 beta is in sync with its Stability grade. In addition, it is currently trading slightly below its 50-day and 200-day moving averages of $23.26 and $21.50, respectively, justifying the Momentum grade. Furthermore, MAT’s 15.05 forward non-GAAP P/E multiple is 22.4% higher than the 12.30 industry average, justifying the Value grade.

Among the 23 stocks in the Entertainment – Toys & Video Games industry, MAT is ranked #8.

Beyond what I have stated above, view MAT ratings for Growth, Sentiment, and Quality here.

Bottom Line

MAT’s strategic nearshoring efforts have been in the pipeline for some time; its mega factory set up in Mexico was first proposed in 2019. In fact, the company has closed several factories across China and Canada as part of its business transformation. While such strategic realignments are expected to reduce MAT’s transportation costs over the long term, its profit margins are expected to take a hit in the coming months due to immense capital expenditures undertaken in the last quarter. Also, the recent closure of factories might impact its total production capacity to a degree. Thus, we think investors should wait until MAT’s operations and financials stabilize before investing in the stock.

How Does Mattel, Inc. (MAT) Stack Up Against its Peers?

While MAT has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Spin Master Corp. (SNMSF), DoubleDown Interactive Co., Ltd. (DDI), and Electronic Arts Inc. (EA), which have a B (Buy) rating.

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MAT shares were trading at $22.21 per share on Monday morning, up $0.26 (+1.18%). Year-to-date, MAT has gained 3.01%, versus a -6.52% rise in the benchmark S&P 500 index during the same period.

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About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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