Mattel Shares Look Attractive for Long-Term Investors

Jaime Katz: After winding down inventory overhang from a weak holiday season, Mattel's recent investor day indicated it might take some time before the company's turnaround proves to be fully under way.

With another $250 to $300 million in incremental investments planned to simplify the company's supply chain, invest in innovation, and build brand presence in emerging markets, we think benefits may not surface in Mattel's profit profile until 2019. With an incremental $150 to $200 million in cost savings the management team expects to harness ahead, on top of the $240 million in gross savings anticipated from the already under way Global Supply Chain program, we think the company can fund its strategic investments without adding leverage to its balance sheet.

Furthermore, the recent dividend reduction--to $0.15 per quarter from $0.38 per quarter--provides additional financial flexibility to invest in the revival of the company's brands, supporting Mattel's longer term turnaround. In our opinion, the company's normalized earnings power remains well above current levels, which we expect to remain depressed in 2017 and 2018 as the company invests in brands and operations before resuming more normalized earnings levels in 2019, when those investments should begin to pay off.

We've recently revised our fair value estimate to $29 and think for shareholders with a three- to five-year time horizon shares remain attractive, trading around the $20 level or at more than a 30% discount to our fair value estimate.