What a brutal six months it’s been for Mattel. The stock has dropped 30.4% and now trades at $14.16, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Mattel, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Mattel Will Underperform?
Even though the stock has become cheaper, we’re swiping left on Mattel for now. Here are three reasons you should be careful with MAT, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Mattel’s sales grew at a weak 2% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Mattel has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 8.5%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, Mattel’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Mattel, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 11× forward P/E (or $14.16 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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