Despite the uncertain environment for consumer companies, Morgan Stanley (NYSE: MS ) analysts led by Megan Alexander are optimistic about the prospects for toymaker Mattel (NASDAQ: MAT ). On Wednesday, Alexander initiated coverage on Mattel stock (ticker: MAT) with an overweight rating and a $27 price target, suggesting a potential 27.2% gain over the next 12 months.
This optimism stems from expectations of improved financial performance as gross margins recover amidst decreasing input costs, inventory rebalancing, cost savings, and a boost from successful licensing efforts such as the live-action "Barbie" film. The movie has been a significant success, generating over $1 billion globally at the box office and contributing to a nearly 19% rise in Mattel's stock this year.
According to InvestingPro data, Mattel's market cap stands at 7.51B USD, and the company's P/E ratio is 34.4, indicating the stock is trading at a high earnings multiple. The company's revenue for LTM2023.Q2 is 5.06B USD, reflecting a decline of 13.28%, which aligns with one of the InvestingPro Tips that Mattel's revenue has been declining at an accelerating rate.
The analysts believe that Mattel offers some of the best risk-adjusted returns, with the stock currently trading well below historical levels. They expect a re-rating on both an absolute and relative basis as earnings revisions turn positive, the company proves resilient in a deteriorating macroeconomic environment, and it capitalizes on its strong intellectual property portfolio.
Morgan Stanley's earnings-per-share estimates for Mattel are 11% and 8% above consensus for 2023 and 2024 respectively. This is attributed to benefits from higher capital returns stemming from the company's stronger balance sheet and accelerating free cash flow.
In addition, InvestingPro Tips suggests that Mattel's liquid assets exceed short-term obligations, which further supports the company's strong financial standing. The company's stock is also trading near its 52-week high, as indicated by the Price % of 52 Week High metric standing at 93.73%.
However, Alexander also highlighted three potential headwinds for top-line growth for companies like Mattel: negative unit trends, ongoing share-of-wallet reversions, and moderating price tailwinds. She noted that consumer spending is expected to slow down as student loan repayments restart, which could weigh on discretionary spending into 2024. Economists forecast a decline in goods consumption, particularly durable goods, along with a deceleration in services consumption.
Other stocks covered by Morgan Stanley included Hasbro (NASDAQ: HAS ), Xponential Fitness (XPOF), and Planet Fitness (NYSE: PLNT ), all initiated at overweight, with respective price targets of $84, $27, and $62. The firm also started coverage of golf equipment maker Topgolf Callaway Brands (MODG) and grill-maker Traeger (COOK) at underweight, with respective price targets of $12.50 and $3.
Despite the cautious outlook on big-ticket items such as boats and grills, due to the delayed impact of higher rates on demand, Morgan Stanley prefers the toys/gaming and fitness sectors citing relative stability in these categories. For more insightful tips on Mattel, readers can visit InvestingPro Tips, which offers additional tips on the company.
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