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BEYOND BARBIE: MATTEL STILL LOOKS LIKE A GROWTH STOCK

Barad and Barbie have been strong team for Mattel shareholders. When Jill E. Barad became CEO in January, 1997, Mattel's stock was trading in the high 20s. It peaked at 46 9/16 last Mar. 16, then fell into the upper 30s. The near-term concern: Toys 'R' Us, a major customer, announced in March that it was cutting way back on the amount of inventory it carries -- which means lower orders for Mattel. Mattel responded with decent first-quarter results on Apr. 16, but it also suffered a large drop in sales of Barbie, its main toy line (accounting for 37% of Mattel's sales). The bigger concern now: Can Mattel meet its sales-growth goals for its established brands -- especially for Barbie products? Pending the answer to that, Mattel closed on May 14 at 41 15/16.

Is Mattel a buy at this level? If you're looking for a core growth holding with a toychest full of strong, sustainable brand names and a global presence, it could be. Analysts generally expect the company to meet its promise to increase revenues 10% a year over the next five years, translating into 15% annual long-term earnings growth (boosted by economies gained from its 1997 merger with Tyco). Portfolio manager Rose Papp bought it in March for the new Papp Focused Fund, a nondiversified fund with only 16 favorite holdings. "There aren't many companies where I'm confident that they are going to grow earnings at 15% every year for five years," she says. "That makes [Mattel] a superior company."

Across Wall Street, however, a consensus on Mattel is hard to find. Although analysts agree that the company is well run, some think the stock will only keep up with the overall market -- not outperform it. Even the most bullish analysts think it should be trading in the 50s. They see the inventory issues as a short-term problem that has already been priced into the stock. Of the 10 analysts surveyed by Zacks Investment Research, four rate it a strong buy, four a moderate buy, and two a hold.

Harold Vogel of Cowen & Co is in the strong buy camp. "We think the bad news is out," he says. "We think the second half of the year will be very strong." Vogel is looking for healthy sales in Mattel's line of toys tied to entertainment, such as Nickelodeon's animated Rugrats and next Thanksgiving's Disney/Pixar movie, A Bug's Life. He also likes the prospects for Hot Wheels toy racing cars. "They can't make enough of them," he says.

Jill Krutick, an analyst at Salomon Smith Barney, thinks Mattel will outperform the market, but she's a bit more cautious on the outlook for Barbie sales given the inventory issues. "It's not just Toys 'R' Us," she says, noting that other retailers are also trying to cut back on inventories. Krutick downgraded Mattel in March based on concerns for the toy industry sparked by Toys 'R' Us. Mattel's stock is trading at about 18 times her estimate for 1999 earnings, or about a 17% discount to the market. So "Mattel is ripe for a rebound," she wrote on Apr. 22. Despite her concerns about Barbie sales, she thinks Mattel has winning products in other areas, including Hot Wheels, Winnie the Pooh, and Sesame Street brands.

The fact is, it's unusual for a high-quality growth company such as Mattel to be trading at a valuation lower than the market. Its 1998 p-e is 19, while the Dow's p-e is 23. "I think Mattel is a superior company and ought to trade at at least a market multiple," says Papp. She says she isn't adding to her positions now -- but will if Mattel dips below 40 again. "I don't think it is going to double in the next year," she says. "But it is a very good, global brand that is obviously well-managed."

By Amey Stone, Associate Editor, Business Week Online, and Kathleen Morris for Business Week in Los Angeles



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ONLINE ORIGINAL: BEYOND BARBIE: MATTEL STILL LOOKS LIKE A GROWTH STOCK


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Updated May 14, 1998 by bwwebmaster
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