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Mattel Inc(MAT-Q)

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A Bull Market Could Be Here: 4 Reasons to Buy Mattel Stock

Motley Fool - Wed Sep 13, 2023

There's no denying that the macroeconomic backdrop could be healthier. Still, given lingering inflationary pressures, benchmark interest rates that are higher than they've been since 2007, and so-so consumer sentiment, the economy is actually holding up pretty well.

Ditto for the stock market. The U.S. may get the soft landing the Federal Reserve was aiming for, sidestep a recession and another bear market, and rekindle the once-budding bull market instead.

If that's what's in the cards, one stock to consider plugging into sooner than later is Mattel(NASDAQ: MAT). Here are the top four bullish arguments for owning a piece of the well-known toy maker.

The Barbie movie has reinvigorated its toy line

There's no reason to ignore the 800-pound gorilla in the room. The success of the film about Mattel's popular Barbie toys has been game-changing. All told, the movie has sold nearly $1.4 billion worth of tickets since debuting in late July, according to Box Office Mojo, making it the year's highest-grossing film.

Mattel doesn't get all of that money, of course. In fact, it won't even get most of it. In general, the U.S. theaters that show the films keep about 40% of their ticket sales. The studio behind the film -- in this case, Warner Bros. -- collects the remaining revenue, hoping to recoup what it laid out paying the movie's actors, directors, distributors, etc., and what it spent promoting the film. And certain key players involved (depending on their contracts) get their own cuts of the net or gross.

As the licensor of the underlying intellectual property, Mattel takes a relatively small cut. Analysts with Stifel initially believed the film would only generate on the order of $25 million worth of licensing revenue for Mattel, and then another $75 million from toy sales directly driven by the movie. In retrospect, though, it's clear that interest in all things Barbie is tremendous.

Here's the catch: The additional demand the movie unleashed hasn't shown up in Mattel's publicly reported results yet. The second quarter, which Mattel reported on in late July, ended three weeks before the film debuted. It wasn't until August that Mattel started to ramp up production of more and new Barbie toys featuring some of the dolls, clothing, and accessories seen in the movie itself.

And a new animated series about Barbie and her friends won't begin airing on Netflix until later this month. In short, we've not yet seen what this film will do to revitalize the toy line, or Mattel's bottom line.

Its CEO understands the importance of media

Now-former Mattel President and COO Richard Dickson has gotten a lot of credit for the Barbie movie and the successful reboot of the toy line it prompted.

At least as much credit should be given to CEO Ynon Kreiz, however, who took the helm of the struggling company back in 2018 with a plan to do precisely this: Use entertainment media to sell toys, and leverage its toys to convince studios and entertainment platforms to partner with Mattel to create new media. Success at each one drives the other.

Kreiz's background isn't exactly in the toy business. The bulk of his experience was actually in television -- children's television in particular. When Mattel hired him, he was the chairman and CEO of Maker Studios, which became a subsidiary of Walt Disney back in 2014. He was also the co-founder and chief of Fox Kids Europe as well as the chief executive of independent television production company Endemol.

In other words, when it comes to media, Kreiz knows his stuff.

Here's the thing: Barbie's success isn't a one-off or a fluke. This entertainment push has been planned with intention for a while now, with the groundwork being laid as far back as early 2019. This film will serve as a template for toy tie-ins for two Disney princess films slated for release by the end of next year, as well as a Hot Wheels-themed movie scheduled for release in 2025.

All told, Kreiz says, there are 14 more films already in the works. Even if each of them only creates a fraction of the frenzy that Barbie has, look for them to drive measurable toy revenue growth.

Cooling inflation will eventually spur demand

Anyone keeping tabs on Mattel's quarterly results of late will know last year was a tough one for the company. Fourth-quarter sales fell 22%, capping off flat sales for the year. And in the first half, 2023 wasn't shaping up any better either. The company's second-quarter sales were lower to the tune of 12%, only modestly improving Q1's big revenue dip of 22%.

Kreiz has been attempting to downplay the impact that the current economic situation has been having on the company, and inflation does finally appear to be abating. The global economy has a good chance of avoiding a recession and remaining in growth mode. That could lead to a rebound in discretionary spending -- a positive for Mattel.

The stock is well under its consensus target

Last but not least, although excitement about the success of the Barbie movie has helped push Mattel stock higher, its recent gains don't fully reflect the level of buzz the film generated. Shares are up 33% from March's low, but still well below last year's peak price, and even well below last year's average price. Macroeconomic conditions and a muted mood are keeping investors tentative.

The analyst community, however, isn't nearly as circumspect in its views about Mattel. Most of them rate the stock a strong buy, based on the pending benefit of the Barbie movie in addition to the other toy-based films Mattel has in the works, and their consensus target price on it is $24.50. That's roughly 15% above the stock's present price, which is at least respectable upside potential. And bear in mind that the business growth that pushes stocks higher often prompts analysts to raise their targets.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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