With respect to earnings surprises, for the trailing four quarters Mattel has performed over a wide span of earnings expectations, in the range of approximately negative 1.7% to positive 333.3%. The average earnings surprise was a positive 137.7%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Previous Quarter Performance
Mattel Inc. reported first quarter 2010 earnings of 7 cents per share, compared with a loss of 14 cents per share in the year-ago comparable quarter. The results were also well ahead of the Zacks Consensus Estimate of a loss of 2 cents per share.
The better-than-expected results were primarily driven by strong sales of its core brands such as Barbie and Hot Wheels and its licensed toy lines, particularly newer ones like the World Wrestling Entertainment, Thomas and Friends, Disney Princess and Toy Story. The company is also focused on controlling its expenses and has reaped benefits.
Worldwide net sales increased 12% from the prior-year quarter to $880.1 million. Both U.S. and international gross sales increased 12% year over year.
Gross margin was 49.1%, up 510 basis points versus the prior-year period. The improvement was primarily attributable to lower product costs, favorable mix, savings from the global cost leadership initiatives and price increases.
Total debt at the end of the quarter was $750 million, a decrease of $150 million from the prior year.
OutlookManagement emphasized that raw material cost pressures and rising Chinese labor rates will be challenges in the second half of 2010, pressuring gross margin, but these will be partially offset by some price increases.
Management expects to reduce costs in the range of $180 to $200 million, and is on-track to deliver the same by the end of fiscal 2010.
Estimates Revisions Trend
Estimates have moved up in the last 30 days, implying that the analysts do see a meaningful catalyst for the time being. The current Zacks Consensus Estimate is $1.80 for 2010, reflecting year-over-year growth of 31.3% and $1.94 for 2011, reflecting year-over-year growth of 7.7%.
Agreement of Analysts
In the last 30 days, out of 14 analysts covering the stock, 1 analyst increased its second quarter estimates and 1 reduced his or her estimate, thus providing no directional movement. 2 out of the 14 analysts covering the stock raised their estimates for fiscal 2010 and 2011 and one has reduced for fiscal 2010 and 2011. The analysts raised the estimates based on top line improvement and margin expansion through cost cutting initiatives. However, one analyst has reduced estimates based on increasing input costs and the adverse impact of a weak Euro.
Magnitude of Estimate Revisions
Following the first-quarter earnings release, earnings estimates for 2010 and 2011 improved to $1.77 and $1.90 per share from the previous estimates of $1.63 and $1.80, respectively. The analysts have based their upward revisions on improvements in business trends and strong first quarter 2010 results.
For fiscal 2010, in the past 30 days the consensus earnings estimate was raised to $1.79 per share and is now expected to be $1.80. For fiscal 2011, in the past 30 days earnings estimate was raised to $1.92 and is now expected at $1.94. The analysts have raised the estimates on increased sales growth driven by a strong product line-up including movie-based toys for Monster High, Toy Story 3 andTangled (formerly Rapunzel) in fiscal 2010 and Cars 2 and Green Lantern in fiscal 2011.
Maintain Neutral Rating
We expect Mattel to post sequentially improved results for the remainder of fiscal 2010 based on top-line improvement following the addition of new product lines for World Wrestling Entertainment, Toy Story 3 and Thomas and Friends. Moreover, we expect margin expansion through its cost-cutting initiatives and implementation of modest price increases for some of its product lines.
Mattel’s primary competitors in the toy and games market include JAKKS Pacific Inc. (JAKK: 14.11 0.00 0.00%) and Hasbro, Inc. (HAS: 41.77 0.00 0.00%).
We have a Neutral rating on Mattel as it has an industry leading position, a strong balance sheet and continues to experience the benefits of its cost-containment initiatives. Its focus on top-line growth, margin expansion and cash conservation also augur well.
However, we remain cautious on the stock based on increasing input costs and adverse impact of a weak Euro. Moreover, competition from private label toys and the video game industry is increasing.
| Analysts' Targets | |
| Caris & Company | $32 |
| Above Average | |
| Tuesday, June 22, 2010 | |
| UBS Securities | $30 |
| Hold | |
| Monday, May 03, 2010 | |
| Dahlman Rose & Co. | $26 |
| Neutral | |
| Friday, April 16, 2010 | |
| Citigroup | $27 |
| Hold | |
| Tuesday, March 09, 2010 | |
| Sterne, Agee & Leach | $26 |
| Buy | |
| Thursday, January 07, 2010 | |
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