Mattel (MAT) had solid second-quarter results, and is expected to show improvements going forward. However, Zacks analyst Sean P. Smith believes the stock is now trading at an appropriate valuation and, therefore, remains a Hold. Read more below:
We maintain our Hold rating for Mattel (MAT) after the release of solid second quarter results. Although the company has recently faced difficulties with respect to margin pressures and deterioration in some of its core brands, results in the second half of 2006 and the first half of 2007 hint at potential improvements going forward.
While we believe that the company's outlook is indeed improving in the form of continued sales growth and margin improvements, we believe that the stock is now trading at an appropriate valuation.
On July 16, Mattel reported financial results for the second quarter of fiscal year 2007. Net sales increased 7% from the prior year to $1.0 billion and were roughly inline with our expectation. Worldwide gross sales for the Mattel brands segment increased 5% from the prior year, attributable to a 2% decrease in gross sales for the Entertainment business (including results from the Radica acquisition), a 6% increase worldwide gross sales for Barbie, and an 1% decrease in the other girls brands. Worldwide gross sales for the wheels category increased 20%. Worldwide gross sales for the Fisher-Price segment increased 12% from the prior year, reflecting strong growth in core products. Worldwide gross sales of American Girl brands decreased 10% from the prior year. The company s gross margin improved 260 basis points from the prior year to 46.1%. Diluted earnings were $0.11 per share compared to $0.10 per share in the year-ago period, and were $0.01 above the Street consensus and our estimate.
Our $29 six-month target price for Mattel is based on approximately 18.5x our 2007 earnings estimate. As shown below, the major toy manufacturers as a group are currently trading at a P/E multiple of 15.4x 2007 earnings estimates, with Hasbro, the closest competitor, trading at 18.1x. Although the company has recently faced difficulties with respect to margin pressures and deterioration in some of its core brands, results in the second half of 2006 and the first half of 2007 hint at potential improvements going forward. We note, however, that the 2006 results have created somewhat difficult comps for the current year. Although we believe that the company's outlook is indeed improving in the form of continued sales growth and margin improvements, we believe that the stock is now trading at an appropriate valuation. We will continue to monitor the shares as the company heads into the second half of the year, during which the company generates the vast majority of its annual earnings.
Read the analyst report on MAT
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