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Spin Master may need to prove it can put a disappointing third quarter behind it.Nathan Denette/The Canadian Press

Having some of the hottest toys on the market hasn’t been enough to stabilize shares of Spin Master Corp. this year, but some analysts and investors believe the play is better long term.

Shares of the Toronto-based children’s toy and games manufacturer, behind brands such as Paw Patrol, Owleez and Bakugan, have been volatile over the past year owing to factors such as the impact of U.S. tariffs on Chinese goods and the loss of Toys "R" Us volume after the company’s liquidation in the United States last year.

The stock is currently trading near the mid-point of its 52-week range of $34.82 and $46.61, and the average 12-month analyst price target of $46.69 suggests Spin Master should be able to return at least to its former highs.

To do so, however, Spin Master may need to prove it can put a disappointing third quarter behind it.

The company reported net income of US$92.1-million or 89 US cents a share in the quarter ended Sept. 30 compared with net income of US$107.9-million or US$1.06 in the same quarter last year. Adjusted net income was 90 US cents in the quarter compared with US$1.15 last year.

Revenue was US$548.1-million, down from US$620-million for the third quarter last year. The company said it shifted about US$40-million of shipments from the third quarter to the fourth quarter, which led to lower revenues in the period. Analysts had expected adjusted income of US$1.22 a share and revenue of US$626.5-million, according to S&P Capital IQ.

"While our performance in the third quarter was negatively affected by several challenges, we do not believe it is indicative of our expected full year 2019 performance nor our long-term growth and value creation prospects,” Spin Master chairman and co-chief executive Ronnen Harary said in a Nov. 5 news release announcing the results.

Peter Imhof, vice-president and portfolio manager at AGF Investments in Toronto, says the stock’s recent pullback is an opportunity to get back into the name. He started selling his Spin Master shares in June, 2018, around $56.50, around the time it hit its all-time high of $59, and sold it off completely last November at around $44.

“We’ve always really liked the story and the management team and their operation. It was more a valuation call at the time,” Mr. Imhof says.

He’s particularly interested in the rollout of its Bakugan action figure franchise and is confident the company’s management team can balance its inventory between toys that are hot and those fading in popularity.

“I haven’t pulled the trigger [on buying the stock again] but I’m more intrigued at these prices," Mr. Imhof says.

CIBC Asset Management’s senior portfolio manager Craig Jerusalim has owned Spin Master stock since mid-2016 and plans to keep holding it, despite the recent volatility. He says the company continues to grow, has no debt and has enough cash on the balance sheet to make acquisitions.

But what Mr. Jerusalim likes most is the company’s “intangibles,” including a culture of innovation and its “ability to punch above its weight class.” He cites the company’s recent announcement that it has been nominated for seven 2020 Toy of the Year Awards. Spin Master says the awards are the “Oscars of the toy industry." Winners will be announced Feb. 21.

“It’s always something new and fresh from this company,” Mr. Jerusalim says. He plans to continue holding the stock longer-term but expects some short-term volatility given the continuing U.S.-China trade war and forecasts of slowing global economic growth.

“There could be some rocky quarters,” Mr. Jerusalim says. “This isn’t an investment for the short term. It’s a long-term compounder.”

RBC Dominion Securities analyst Sabahat Khan has an “outperform” (similar to buy) rating on Spin Master stock with a $54 target, which he lowered from $55 after the recent earnings miss.

While the results were “a negative surprise, we view the setup heading into 2020 favourably,” Mr. Khan wrote in a Nov. 6 note, adding that the company “strong [free cash flow], clean balance sheet, low relative valuation, and potential for [mergers and acquisitions] are also supportive of our outlook.”

Canaccord analyst Derek Dley reiterated his “hold” rating on the stock after the recent earnings and lowered his target price to $45 from $46. In a Nov. 6 note, Mr. Dley cited the company’s specific challenges, including the reduced popularity of its Hatchimals brand, as well as broader retail industry pressures, for his more cautious outlook.

“While we continue to be impressed with Spin Master’s ability to create coveted toy brands and verticals, we believe the disruption to the toy industry caused by the closure of key retailers, along with the deceleration of some key franchises for Spin Master will remain a challenge in the near term,” Mr. Dley wrote.

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