Child’s Play

An investor's portfolio is never set in stone.  There are always opportunities to find new businesses to invest in, more property to purchase, or a new way to reduce risk.  At this point, my family isn't able to invest in real estate, so we are investing what we can in the stock market.  By doing this, we can create income and wealth to share with others.  I'm always on the lookout to reduce our investment risk, and if I find a company that can reduce our risk and increase our income, then I'm interested in analyzing it further.

Business Description

Mattel Inc. (MAT) is one of the top toy companies in the world. MAT designs, manufactures and markets its toys to its customers, children, worldwide. Mattel invests in toy brands, and leverages the brand equity in order to generate more sales. Some of their iconic brands include Barbie, Hot Wheels, and Fisher Price. I'm sure we can all remember our first fisher price toy, or that one commercial as a child that made us nag and complain to our parents about how much we needed this toy for christmas.

What matters most: Cash money

Before we talk about the company's cash holdings and ratios, I think it's important to talk about its debt. MAT has $2.1 billion worth of long term debt on its balance sheet, and of this amount, $20 million is current. MAT has $518 million in cash and $2.8 billion in current assets, which results in a quick ratio of 1.55 and a current ratio of 3.2. MAT has a large portion of its current assets in accounts receiveable, but as long as they can collect payments, there shouldn't be any issues with converting this to cash. This is a pretty good cash position MAT has, considering that product companies sometimes have too much of their cash locked up in inventory. I usually like to invest in companies with a P/FCF of 15 or below, and would consider adding a stock to my portfolio if it fits this criteria. MAT's cash flow from operations is $905 million, resulting in $1.91 of free cash flow per share and a P/FCF ratio of 15.7.

Dividends The privilege of ownership

I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested and reinvest those dividend payments into a snowball of dividend checks. MAT went from paying annual dividends to quarterly dividends in 2011, and since 2003 it has been consistent in raising its dividend. MAT currently pays $.38 a quarter, or $1.52 annually, with a current yield of 5.2%. Their dividend payout ratio, when compared to earnings, is 65% and 79% when compared to free cash flow. The dividend seems like it can be sustained, although I'd like to see MAT incease its free cash flow. I like to do some calculations to see how long it would take one share of a company's dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compounding. It would take 19.2 years for one share to become two MAT shares with the current level of dividend payments. I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal. It's interesting to note that, if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield. Buying 19.2 shares would result in an extra share at the end of the year, generated by passive dividend income.

Book value – Real company value

MAT's P/B ratio is 3.4, meaning it is priced more than triple its actual value. I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I'll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it. I'm not sure if MAT is worth paying a little extra for its dividend income, even though it does have a stable balance sheet. A 5.2% dividend yield is nothing to scoff at, so I will definitely keep MAT on my watchlist.

Income – How well a company is managed

I normally don't like to rely on the income statement as a measure of value. I do think it offers the best glimpse of how well a company is able to manage its expenses while generating revenue, but I'll rely more on the cash flow statement to find value. MAT's P/E ratio is 12.7. Most people invest in companies that have a P/E ratio between 15 and 25 while companies with a P/E ratio of 20 are seen as fairly valued. Using this method, MAT would be priced at an attractive PE. Honestly I don't care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies. MAT has a gross margin of 53.6%, an operating margin of 18% and a net margin of 13.9%. This tells me that most of the expenses MAT incurs has to do with developing, manufacturing and marketing itsproducts. MAT also has a significant amount of operating expenses that are reducing its profit margin.


Using Guru's DCF calculator and inputting FCF of $1.91 we get a valuation of $26.41 a share, and $28.69 a share after adding tangible book value. The company does have some property and equipment, so we shouldn't overlook their tangible book value per share. The company is pretty cheap when looking at its P/FCF, and P/E ratios. This could present a potential buying opportunity for an investor that is interested in buying a company with a solid balance sheet and cash generating abilities. An investor would have to seriously consider their investment philosophy and see whether investing in this business coincides with their investment objectives.

Leave a Reply