Mattel Positioned for Success Despite Challenging Consumer Environment, Says Morgan Stanley
According to Morgan Stanley, toymaker Mattel has the potential to shine even in the face of a shaky environment for consumer companies. Analyst Megan Alexander initiated coverage on Mattel with an overweight rating, considering it a top pick, and set a price target of $27 per share. This projection suggests that the stock could experience a gain of 27.2% over the next 12 months. Alexander acknowledged that the stock already reflects some of the headwinds associated with the tough macroeconomic outlook, but believes that revisions have not yet reached their lowest point.
Strong Risk-Adjusted Returns and Growth Factors
Alexander emphasized that Mattel still offers some of the best risk-adjusted returns in the market. She further explained that the stock is currently trading below historical levels, and Morgan Stanley expects it to re-rate both absolutely and relatively. This re-rating is anticipated to occur as revisions turn positive, the company demonstrates resilience in a deteriorating macroeconomic environment, and it capitalizes on its strong intellectual property (IP) following the success of the Barbie movie.
Earnings Estimates and Market Performance
Morgan Stanley's earnings-per-share estimates for Mattel in 2023 and 2024 are 11% and 8% above consensus, respectively. These estimates are driven by expected improvements in gross margin and benefits from higher capital returns, supported by the company's stronger balance sheet and accelerating free cash flow. The positive outlook has already had an impact on the stock, with shares of Mattel rising by 1.9% in premarket trading. Furthermore, the stock has experienced significant growth of nearly 19% this year, boosted by the success of its live-action "Barbie" film, which surpassed $1 billion in global box office revenue.
Despite the optimistic outlook, Alexander did highlight three headwinds that could impact topline growth for companies like Mattel. These include negative unit trends, ongoing share-of-wallet reversions, and moderating price tailwinds. Additionally, Morgan Stanley's economists forecast a slowdown in consumer spending, particularly in durable goods, and a deceleration in services consumption due to the expiration of the student loan moratorium.
In conclusion, while the consumer environment may pose challenges, Mattel's strong positioning, potential for re-rating, and favorable earnings estimates make it an attractive investment opportunity, according to Morgan Stanley.
Implications of Mattel's Positioning for New Business Ventures
Morgan Stanley's favorable outlook on Mattel, despite a challenging consumer environment, presents interesting considerations for new business formations. The toymaker's potential for success, even amidst economic headwinds, offers valuable insights for budding entrepreneurs.
Resilience Amidst Economic Challenges
The fact that Mattel is expected to shine in a shaky environment underscores the importance of resilience for any new business. Alexander's assertion that Mattel's stock already reflects some of the macroeconomic challenges, yet still holds potential for growth, suggests that new businesses can also navigate and potentially thrive amidst economic uncertainties.
Value of Intellectual Property
The success of Mattel's Barbie movie, which significantly contributed to the company's market performance, highlights the potential of strong intellectual property (IP) in driving business growth. This could be a key takeaway for new businesses, emphasizing the importance of creating and leveraging unique IP.
Impact of Consumer Spending Trends
However, the potential headwinds identified by Alexander, including a forecasted slowdown in consumer spending, particularly in durable goods, and a deceleration in services consumption, could pose challenges for new businesses. These trends suggest that new ventures, particularly in the consumer goods and services sectors, may need to brace for potential slowdowns and devise strategies to navigate these challenges.
In essence, while the consumer environment may present obstacles, Mattel's resilience and successful leveraging of its IP offer valuable lessons for new businesses. The toymaker's experience underscores the importance of strategic positioning and innovation in navigating economic uncertainties.
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