UPDATE: Barbie Gets Decapitated
Analyst: Chris Bulkey (12/15/98)
Just seven weeks ago we warned that troubles at Mattel were worse than the company was letting on. We highlighted several factors behind our bearish take on Mattel Inc. (NYSE: MAT) including a glut of cheap foreign products and the lack of a blockbuster toy, which we felt would lead to another earnings disappointment. Management, we figured, wasn't coming clean. Yesterday, Mattel management fessed up, admitting that the outlook for profits looks bleak. That bad news slashed more than $2 billion from the company's market capitalization on Monday. The stock plummeted $8.13, or a whopping 27%, to close at $22.00. Mattel's stock is down 31% since our October update
when the stock was trading at $32.00. When Mattel pre-announced disappointing third quarter earnings, in September, management predicted that the company would still achieve 18% growth in per share earnings for the year. To do that Mattel would need to earn at least $1.95 for the year. In our recent write-up, we noted that earnings estimates were too high and would need to be revised downward. On Monday management confirmed that stance in a big way. Mattel's management now expects earnings of $1.20 for the year, a 27% decline from year-ago results. This kind of poor guidance does not sit well with analysts, and it will take some time for Mattel to regain credibility.
Learning the Hard Way
There is no doubt that Mattel's core toy market is softening. Investors could have seen this as early as the second quarter when Mattel announced declines in revenue and earnings. In a tacit acknowledgement that the toy industry is in trouble, the company just announced its plan to spend a whopping $3.8 billion to purchase The
Learning Co. (NYSE: TLC), a leader in educational software products. Mattel hopes to lessen its reliance on the weak retail market for toys by entering the fast-growing software market. But a peak behind the numbers indicates that Mattel is massively overpaying.
In a typical deal, the acquired company should get a nice pop. But shares of TLC actually fell $3.31, to $25, instead of climbing towards the proposed $33 a share take-out price. Here's why. TLC's purchase of Broderbund Software in August of this year, accounted for as a pooling of interests, has diluted the company's earnings and left the balance sheet a mess. TLC has $195 million in long-term debt and only $173 million in equity for a book value of $1.93. That means that Mattel is going to
pay 17 times book value for TLC -- a very hefty premium.
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