Is there any value in Mattel?

I bought a starter position in Mattel last year as I talked about here nearly six months ago.  Since then...it has hardly covered itself in glory (even if the US dollar has been strong versus my base currency of the Pound).

Back in November I talked (at the above link) I talked about brands and dividends and the opportunity from Christmas trading...but I think it is fair to say that the company did not take full advantage of this with the Q4 numbers a clear disappointment as even the company acknowledged: 

So they hint at some of the reasons above...currency translation (that old chestnut!), a very shabby performance by their still recently acquired MEGA Brands division and then POS (position of sales) issues which sounds like the function of a competitive market...

...which was confirmed by another chart in their presentation document highlighting challenges, issues and difficulties across their full range of brands:

Still pricing and an efficiency drive were positives...

...but nothing that could stop the shabby across-the-board operating profits progression:

So what to think at a US$8.8bn EV today?  Well statically using the full year 2014 at x13s EV/ebit it is hardly cheap...so unsurprisingly after such a shocking quarter/year it is all about the future.  After all recapturing the FY13A numbers puts the stock on less than x8 EV/ebit which for such a branded business is clearly highly attractive.  

Two pieces of interesting news to consider before we take a look at the balance sheet (and sustainability of the dividend).  First, I was pleased to see that the executive board have made a management change and earlier this week confirmed that Christopher Sinclair (named as the Interim CEO in January) would be made permanently the CEO after the resignation of the previous incumbent Bryan Stockton (although due to a contract condition the latter was bought back as an operational consultant - slightly strange but apparently cheaper than buying out his contract completely).  

The second is that clearly product is hugely important.  The announced loss of the Disney Princess contract to arch-rival Hasbro was also a blow...but forces the company to work its current portfolio harder - which surely has been the key issue with the company which has rested far too long on its laurels as the children toys #1.  News in the last few days that the Hasbro market cap has exceeded that of Mattel's (for the first time since 1993!) surely is some element of a wake-up call.  

Predicting child toy trends is always difficult but I was pleased to read here of what appeared to be some progress: 

'At February's International Toy Fair in New York...showed off two products seen as changing the way of doing business at Mattel: a modern version of the View-Master that incorporates virtual-reality technology from Google Inc.; and Hello Barbie, an interconnected version of the doll that understands and responds to speech. Both are examples of working faster and incorporating technology into its products, two knocks against the company in recent years'

This is better.  Of course any product-led turnaround is rarely a straight line...and needs a sensible balance sheet to allow a degree of time to lapse.  On this basis Mattel has one good aspect...and one less optimal aspect.  

The good aspect is the relative strength of the balance sheet with net debt only a little more than one times reduced ebitda.  That gives some flexibility (and the company has not been shy about using free cash flow generated to buy back shares too - Mattel has repurchased over 57 million shares, at a total cost of approximately US$1.7 billion, since 2010).  The question though is whether the company's current 6%+ dividend yield is sustainable.  With the compressed profitability noted above Mattel (on a pre-acquisition basis) just about covered the dividend but not the dividend and the buyback. 

Back in November at the above link I noted the company's commitment to the dividend but I am not so sure under a new CEO whether they will look to 'evolve' it.  Turnaround plans often can do with greater funds and - let's face it - a 3-4% dividend yield would still offer pretty compelling income plus a turnaround prospect (and capital growth potential). 

I wonder if the shares rise on a debasing of the dividend?  Certainly there is the scope for profitability to rise from the FY14A level to something closer to the FY13A level and this would make the stock today good value.  All things considered following the Easter break I am thinking about buying some more shares in Mattel targeting something in the upper half of the US$20s (with some element of a profits recovery closer to US$1bn AND with a still attractive dividend equivalent to x10+ forward EV/ebit).