Even though Mattel (currently trading at $16.16 per share) has gained 11.3% over the last six months, it has lagged the S&P 500’s 16.8% return during that period. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Mattel Will Underperform?
We don’t have much confidence in Mattel. Here are three reasons we avoid 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 put up a good quarter or two, but many enduring ones grow for years. Regrettably, Mattel’s sales grew at a weak 1.2% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 8.9%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Over the last few years, Mattel’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Mattel falls short of our quality standards. With its shares trailing the market in recent months, the stock trades at 11.4× forward P/E (or $16.16 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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