Monday, January 29, 2007

Mattel Not So Swell

Mattel Inc (NYSE:MAT) served up some psuedo good results. EPS is up but the number was partially tricked by reducing total amount of shares outstanding. Income before taxes increased from $652 million to $683 million. The provision for taxes dropped dramatically from $235 million to $91 million. I almost never believe huge drops in income tax when they happen and fully expect some restatement in the future. This low level of taxation will probably not hold in future quarters. Management essentially makes no comment about it in the press release and probably does not want to talk about it.

While some good news was observed in sales and margins the SGA rose by 100 basis points as announced by the company. Never a good sign. Of particular note was the drop in advertising from 12.1% of revenues to 11.5%.

The stock trades very near its 52 week high with an improbably high dividend yield of 2.70%. Insider trading and institutional trading has been overwhelmingly in the sell column for the past six months. Robert A. Eckert, chairman and chief executive officer of Mattel states that he is pleased that margins are improving and that the sale of Barbie products has finally turned positive; something that has not been seen since 2003.

On balance the company may have some more performance increases to serve up. But real growth that will create shareholder wealth probably needs to come from acquisitions and or new products. Lo and behold Mattel has approximately 25% of their balance sheet invested in cash. With a market cap of approximately $9.12 Billion cash on hand is approximately 15% of market cap. The total debt to capital ratio stands at 22.3%.

Acquisitions are not wrong but this company will probably look very different in about two years. Is this the management group to act as the change agents and take the company forward?