The world’s largest manufacturer of toys, Mattel Inc. (MAT), reported its third quarter 2010 results on October 15, 2010. EPS surpassed the Zacks Consensus Estimate by a penny. The recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both the short-term and the long-term are covered in depth below.
Earnings Report Review
During the third quarter of 2010, Mattel reported earnings of 77 cents per share, up from 63 cents in the prior-year quarter. Earnings included a tax benefit of $0.05 per share. The result was primarily driven by strong sales from its core brands such as Barbie, solid contribution from Toy Story 3 and World Wrestling Entertainment properties, partly offset by declines in Hot Wheels and Fisher-Price Brands as well as cost escalation.
Worldwide gross sales were $1996.9 million, up from $1955.9 million in the prior-year quarter and above the Zacks Consensus Estimate of $1940.0 million. Including the negative impact of foreign currency fluctuation, net sales were $1833.1 million, up 2% year over year. U.S. gross sales improved 3% year over year and international gross sales inched up 2%.
(Read our full coverage on this earnings report: Mattel Beats by a Penny)
Earnings Estimate Revisions: Overview
Following the earnings release, the Zacks Consensus Estimate for the company increased slightly, implying that the analysts see a meaningful catalyst for the time being. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
In the last 7 days, eight analysts out of 13 raised their fourth quarter estimates while 1 pulled back. For fiscal 2010, nine out of 14 analysts increased their estimates while none moved in the opposite direction.
Analysts increased their estimates as holiday season is coming and the company generates a large proportion of its net revenues during the fourth quarter as the demand for toys is highest. Thus, along with top-line improvement, gross margin is also expected to expand driven by price increase, mix and savings from its cost cutting initiatives, offsetting the input cost pressure.
Analysts also expect Mattel to hike its annual dividend when the board meets in November as well as repurchase shares, given that the cash position of the company is solid.
However, one analyst reduced the fourth quarter estimate based on slight weakness in key lines of business. The retailers are also holding back their orders as holiday season is ahead and customers have a tendency for last minute shopping.
For 2011, two of 14 analysts raised their estimates, while 3 pulled back. As a result, the estimate revisions trend, though mixed, drifted to the negative side. Analysts have slashed their fiscal 2011 estimates as they expect gross margin to decline during that period due to higher royalty, legal and input cost. Moreover, interest burden of the company is expected to be higher due to the $500 million of debt issued in September 2010.
However, two analysts have increased their estimates based on the company’s strong product line up, including Cars 2 and Green Lantern in 2011 and a lower share count.
Magnitude of Estimate Revisions
In the last 7 days, earnings estimates for fourth quarter 2010 increased by a penny to 85 cents. Fiscal 2010 estimates inched up by 2 cents to $1.82 and fiscal 2011 estimates remained unchanged at $1.95. The magnitude of estimate revisions indicates that the Zacks Consensus Estimate has moved slightly since the earnings release.
Mattel at Neutral
We remain positive on Mattel as the company has an industry leading position, a robust balance sheet and continues to benefit from its cost containment initiatives. Its focus on top-line growth, margin expansion and effective cash deployment also bodes well. Moreover, the company is approaching its fourth quarter, which is the holiday season and is expected to generate considerable revenues.
However, we remain cautious on the stock based on increasing input costs and an adverse impact from the currency exchange rate. Moreover, competition from private label toys and the video game industry is intensifying and orders from retailers remains conservative.
Accordingly, we have a Zacks Rank of #3 (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.