Money Matters - Simplified

How Much Is Mattel Worth?


We can't say Mattel (NYSE: MAT) made it through the recession totally unscathed. In 2008, the company saw its margins get crunched and that was followed by a sales dip in 2009. Of course, the weakness Mattel experienced was nothing compared to what many other companies experienced, and through the tough times the company stayed solidly profitable and free-cash-flow-positive.


We can probably attribute the company's recession-fighting abilities to the resilience of toys -- many parents would rather treat their kids to a new toy than pamper themselves with an "extra" -- and a superstar portfolio of brands that includes Barbie and Fisher-Price.

But what of Mattel's stock? Is it a bargain right now? Let's take a closer look.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check how similar companies are valued. So let's take a look at how Mattel stacks up.

Company

Total Enterprise Value/ Trailing Revenue

Total Enterprise Value / EBITDA

Price / Book Value

Next 12 Months PEG

Mattel 1.7 8.8 3.3 1.6
Hasbro (NYSE:HAS) 1.9 9.5 4.4 1.6
JAKKS Pacific(Nasdaq: JAKK) 0.5 6.6 1.3 1.3
Jarden (NYSE:JAH) 0.9 9.0 1.6 1.0
LeapFrog(NYSE: LF) 0.8 11.1 2.1 0.9
RC2 (Nasdaq:RCRC) 1.2 8.7 1.8 1.2
Average* 1.1 9.0 2.2 1.2


Source: Capital IQ (a Standard & Poor's company) and Yahoo! Finance.
*Average excludes Mattel.

Using each of those averages to back into a stock price for Mattel, and then taking the average across those results, we can come up with an estimated price per share of roughly $20. This would suggest today's price just shy of $26 could be significantly overvalued.

A comparable company analysis like this can sometimes raise as many questions as it answers, though. For instance, is the entire group properly valued? A supposedly fairly valued -- or even over-valued -- stock among a bunch of other undervalued stocks may actually be an undervalued stock, and vice versa.

Also, while these businesses are comparable to Mattel, none is a perfect match. Hasbro is the closest and actually trades at similar (though somewhat higher) multiples than Mattel. JAKKS Pacific and RC2 are both toy companies with some significant brands under their belts, but they're also smaller, younger, and don't have nearly the track record of either Mattel or Hasbro. LeapFrog, meanwhile, is outside of the traditional toy model and has just recently started to prove that it can be profitable again.

With all that in mind, it's best to combine comparable company analysis with another valuation technique.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow (DCF) analysis. Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and attempts to predict the future, it can be a fickle beast, and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For Mattel's DCF, I used the following assumptions:

2010 Unlevered Free Cash Flow $564 million
FCF Growth 2011-2014 8.5%
FCF Growth 2015-2019 4.3%
Terminal Growth 3.0%
Market Equity as a Percentage of Total Capitalization 89.0%
Cost of Equity 12.0%
Cost of Debt 5.6%
Weighted Average Cost of Capital 11.1%


Source: Capital IQ (a Standard & Poor's company), Yahoo! Finance, author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of roughly $25 for Mattel's stock. This would suggest that the stock is roughly fairly valued, if not slightly overvalued.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well-advised to play with the numbers further before making a final decision on Mattel's stock.

That said, pegging the price right between the two valuation models -- which gives us $22.50 -- it would seem that Mattel's stock isn't exactly a bargain right now. This is hardly a final word on Mattel's stock, though. Investors more optimistic about future growth or those who are comfortable with a lower rate of return -- and who therefore might use a lower cost of equity -- would come up with a higher valuation for the stock than I have.

As for me, I've got money on the line with this one as Mattel is part of my personal portfolio. I bought my shares at a considerable discount to today's price and don't have any plans to add to my position at today's prices. I am, however, comfortable holding on and collecting the 3.2% dividend as long as the stock doesn't creep into seriously overvalued territory.

© 2010 UCLICK L.L.C.