Q3 Preview: Mattel (MAT) Poised to Beat as Brands, Reach Provide Momentum

Shares of Mattel Inc. (NYSE: MAT) closed slightly lower Thursday heading into its third-quarter earnings release, expected out before the market opens Friday.

Analysts are expecting Mattel to report earnings of 86 cents per share on revenue of $1.97 billion. Earnings would be a major increase from 23 cents per share reported last quarter, and an 11.7 percent jump from 77 cents per share reported in the same period last year. Mattel has beaten analyst estimated by an average of 3.3 percent over the last four quarters, indicating potential EPS of 89 cents per share.

The maker of Matchbox and Barbie toys has seen its shares drop about 5 percent in the quarter. The stock is 7.5 percent higher since the end of the quarter and up 12.4 percent for 2011. Mattel has traded within a range of $22.01 to $28.49 over the last 52-week time frame.

Mattel is trading for 11.8x next year's earnings estimates, compared with 10.1x at Hasbro Inc. (NYSE: HAS), and 11.1x for JAKKS Pacific, Inc. (Nasdaq: JAKK).

Data from Bloomberg has 13 analyst with a Buy rating on Mattel, four at Hold, and none with a Sell rating. The analyst price target average is $32, with a low of $28 and high of $36.

Analyst Comments

• Goldman Sachs sees Mattel as a defensive play, with sales down only 1 percent in 2009 when GDP was 3.5 percent lower. Goldman notes action toy and board games were up on the year.
  
  Goldman believes about 45 to 50 percent of Mattel sales come from outside the U.S. "The emerging market portion is compounding at a double-digit rate providing a 1 to 2 point lift to sales growth per year, and adding some stability/diversity to the P&L. However, this international exposure also exposes [Mattel] to foreign exchange fluctuations."
  
  
• Wedbush is modeling for earnings of 83 cents per share and revenue of $1.91 billion, which Wedbush attributes to solid sales of Cars 2 toys. Looking ahead, Wedbush is expecting a strong holiday 2011 showing, with Fijit Friends, Monster High, Disney Rock Star Mickey, and Power Wheels all making top-toy lists. The firm comments, "The company’s success in new products (despite the loss of Sesame Street), reductions in its cost structure, and management of its retail inventory should help the company increase profitability in 2011 faster than revenue growth."
  
  
• Following August NPD data showing a 1.5 percent decline in U.S. toy sales, Wells Fargo said 2011 growth will be characterized by, "(1) incremental revenue streams from new licenses Thomas and WWE (both added in 2010), (2) a broad rollout of Monster High, (3) CARS 2 and Green Lantern, (4) about 7% yr/yr pricing beginning in Q2 2011, and (5) favorable FX all tempered by (1) a falloff in Toy Story revenue, and (2) loss of Sesame Street (estimated $62MM)."
  
  The firm believes the market is in "a multiyear secular bull given (1) favorable U.S. birth demographics driven by Gen Y having children, (2) low preschool penetration in international markets, and (3) global retailers likely increasing preference to deal with larger players with owned/licensed IP (allowing for pricing power and ability to activate multiple product areas for retailers), international distribution, ability to effectively deal with input/FX volatility/regulatory issues, precipitating market share gains."
  
  
• KeyBanc is looking for EPS of 91 cents per share, with revenue growth of 6.7 percent and operating margin of about 21.4 percent. KeyBanc said Mattel is its top pick into the quarter saying it "currently has the strongest product momentum and store placement, coupled with an enviable inventory position. It appears that the Cars properties outperformed the rest of the summer movie properties and the Monster High dolls, Barbie and several other Mattel core properties will be a staple for the 2011 holiday season. Further, we believe Mattel has the most dominant international business, which we view as a nice complement given the solid momentum experienced thus far in 2011."
  
  Commenting on prospects, KeyBanc said, "Longer term, we continue to believe there is a capital deployment catalyst as Mattel should end the year with well over $1 billion in cash (lower in 2Q11 due to working capital requirements), which we believe will be deployed during 2011 in the form of both dividend increases and share repurchases (additional $500 million repurchase authorization recently added)."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Mattel's past performance at Streetinsider's Mattel Income Statement.