Mattel, Inc

(MAT) (Hold) Current Price: $42.38 Target Price: $48.11 Mattel, Inc., together with its subsidiaries, designs, manufactures, and markets various toy products. The company operates in three segments: North America, International, and American Girl. Its products comprise fashion dolls and accessories, vehicles and play sets, and games and puzzles. The company also publishes advice and activity books, as well as magazines. It offers its products under the Mattel Girls and Boys brands, including Barbie, Polly Pocket, Little Mommy, Disney Classics, Monster High, Hot Wheels, Matchbox, Tyco R/C, CARS, Radica, Toy Story, Max Steel, WWE Wrestling, Batman, and Superman; Fisher-Price brands comprising Fisher-Price, Little People, Baby Gear, Imaginext, Dora the Explorer, Go Diego Go!, Bubble Guppies, Thomas & Friends, Mike The Knight, Octonauts, Mickey Mouse Clubhouse, Disneys Jake and the Never Land Pirates, See N Say, and Power Wheels; and American Girl Brands, such as My American Girl, Bitty Baby, McKenna, and the newest Girl of the Year. The company sells its American Girl products directly to consumers through catalog, Website, and proprietary retail stores in the United States and Canada. Mattel sells its other products directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; to wholesalers; and through agents and distributors worldwide. The company was founded in 1945 and is headquartered in El Segundo, California. The companies carry its product in with three major brand names: 1) Mattel Brand, which includes Barbie, Man of steel, Monster High etc. 2) Fisher Price, includes Thomas & Friends, Little People and other products designed and targeted for infants 3) American Girl, which is a designated stores selling the American Girl dolls with accessories and other services. Highlights Mattel Inc. q2 results maintained impressive 51.3% profit margins, consistent with the previous quarters. Q2 sales is 28% lower than last years, with 0.21 EPS compared to 0.28 last year. Sales by excluding $14 million impairment charge in the Q2, recurring EPS would have been $0.24. Cannibalization effect took over the sale of its other traditional products such as Barbie, which sales decreased by 12%. Introduced new line of business Ever After High targeted older girls (age 10~13), with much anticipation for better sales from this relatively uncharted market. Divided is increased by 16% compared to last year. Industry overview As technologies advanced, not only it brought convenience to our day to day life: ranging from communicating with our friends, keeping updated with news and current events to educations, it completely changed the life style that we used to live. With new alternatives, the older generations users would usually undergo a transition period to switch from the traditional platform to the new ones. We have seen classic example with the postal service when we used to be expecting to receive a letter

from your friends or a Christmas card from your love ones which were delivered to your door. With the advancement of electronic documentations (email, MSN, whatsapp etc), the traditional forms of communications have become spontaneous, casual and convenient. In contrast to the new generations, they did not even go through the transition period, because they were born in this electronic era in which communications is expected to be made easy and updated at any time. This imposes a threat to traditional businesses such as Mattel which used to produce traditional dolls such as Barbie and toy cars that kept many young children fascinated and entertained since the 60s. Ever since the introduction of video games console, the toys making industry has been facing challenges and these challenges have been increasing as internet, game consoles etc. advances at a unprecedented speed. Instead of competing against these new emerging entertainments, Mattel has strategically changed its business concept from just selling toys to forming franchises around the traditional products. The franchise would be built around the core product, which would include other by-products such as online videos, CDs, books and other accessories etc. MATs digital engagement is virtually repackaging products that they are specialized in (i.e. Dolls) and targeting the focus group of new generation whom was raised with digital media. Valuations and forecasts Our model is based on the expected long term growth at 3.95 percent per annum as observed through its recent five years earnings excluding the outliers with the reported results. The expected growth rate is downwardly adjusted due to the disappointing Q2 results, which might signal similar lower than expected results in the next two quarters. My concerns over MATs future sales were also supported by observing recent disappointing results from Toys R US, signalling the sluggish demands for the entire industry as a whole. However, having said that, the determining quarter for most of the retailers business especially toys makers such as Mattel would fall into the Christmas holiday season when sales should be at the peak of the entire year. Theres still about half a year until Christmas, I believe the overall economic outlook and confidence should be improved by then and that the new line of business, including the Ever After High brands would have enough of time to develop market exposures to maximize the holiday sales. Earnings per share is expected to reach 3.92 in year 2022 based on the sated 3.95 percent annual growth. As a financial strength, MAT has been able to maintain its profit margin one of the highest in the industry, which translates into cost efficiency, and good management controls. By applying the current P/E ratio of 18.47x, the future price in 2022 is estimated to be 90.38 including $18/share dividends. Because its sensitivity with the market is relatively neutral (Beta .98), the market risks that MAT is exposing is almost at 1:1 ratio, ie if the market goes up/down 1 percent, its expected that MATs trading price will also change at the same magnitude and directions. By discounting the future estimated price with our calculated required rates of return, I believe the present intrinsic price for MAT is $48.11 per share, which is about 14 percent from the current trading price.

Direct Competitor Comparison

MAT
Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm): Gross Margin (ttm): EBITDA (ttm): Operating Margin (ttm): Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm): 14.64B 28,000 0.07 6.49B 0.54 0.19

HAS
5,500 0.02

JAKK
828 0.06

5.89B 146.57M

4.10B 671.43M 0.51 0.15 0.3 11.13M -0.02

1.39B762.75M

799.11M331.91M -116.36M 2.3 18.47 1.84 2.32 2.52 18.05 1.61 1.47 -5.07 N/A N/A 0.23

Revenue Million 2013 2012 2011 2010 2009 2008

1Q 2Q 3Q 4Q Year 995.6 -- -- -- -- 928.5 1,159 2,078 2,256 6,421 951.9 1,162 1,999 2,154 6,266 880.1 1,019 1,833 2,125 5,856 785.7 898.2 1,792 1,955 5,431 919.3 1,112 1,946 1,940 5,918

Earning Per Share 1Q 2Q 3Q 4Q Year 2013 0.11 E0.30 E1.11 E1.19 E2.66 2012 0.02 0.28 1.04 0.87 2.22 2011 0.05 0.23 0.86 1.07 2.18 2010 0.07 0.14 0.77 0.89 1.86 2009 -0.14 0.06 0.63 0.9 1.45 2008 -0.13 0.03 0.66 0.49 1.05

MAT Intrinsic Value EPS e xpected EPS Growth (Assumption) PE DIVIDEND PAYOUT EXPECTED STOCK RETURN

2.66 3.95% 18.47 55% 1.07

Forecasted Stock Price i n 2022 Earnings Per Share after the 10th year

72.38 3.92

TOTAL DIVIDENDS Forecasted Stock Price i n 2022+DIVIDENDS

18.00 90.38

Net Present Value 48.11 Recommendations (Hold) Mattels strategy of franchising its products has proved its viability in the quarter 2 results despite the overall earnings disappointed the earlier estimates. Product lines such as Monster High dolls, Ever After High, were being marketed with supports like cartoon videos on YouTube, published books, online games etc. The regularly updated story lines have been well received by the children, helping the Girls Brand worldwide sales increase by 23 percent. From this success, I feel that Mattel has the potential to maintain competitive in the market and to capture an even better market share and sales in the key holiday sales. My earlier estimated trading price is based on a rather conservative growth rates, and the reasons that I have chosen to be precautions were based on the recent Q2 results. Another alerting observation that I made was related to the significant increase in its operating cash flow usages ($286 million compared to $62 million last year) and that the funding was mainly covered by issuing long term debts. The shares repurchase program and the newly increased dividends would require MAT to maintain its liquidity and to keep adequate amount of reserve to continue the programs and to service the obligations coming from long term loans. MATs trading price has declined dramatically since its earnings announcement, I would maintain an observation over statistical results such as consumer confidence index, and employment survey results to determine if the economic outlook would continue to improve over the key holiday periods. For the meantime, I would recommend MAT with a Hold rating, and to revisit the companys outlook upon new macroeconomic indicators.