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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mike 2.0 who wrote (7482)	6/8/1999 2:34:00 PM
From: Michael Burry	Read Replies (1) \| Respond to of 78659

Re: MAT, Three Stooges Three Stooges beer? I just gotta try it ;0 I'm reposting my post on MAT from the Buffettology thread, as it has some relevance to some of the discussion here. Barbie's numbers revisited I did go through the available information on the pro forma Mattel-TLC combo. Here's what I found. Not that I believe it twister-proof, and there is a lot of assumption and missing pieces here for the determined to pick at. Late last pm, I just didn't have the time (not that I do now either). We all know that TLC has had an ambitious M&A program. This has resulted in a lot of intangible assets to be written off. Moreover, both Mattel and TLC have undertaken large restructuring charges in the last few years. The following are rough, as detailed pro forma cash flows have not yet been provided. 1998 1997 1996 NI 150M -189M 14.6M Amort 135M 487M 467M Cash flow 285M 248M 482M Per share 0.65 0.81 1.31 Charges 130M 344M 12M Operating Cash Flow before charges 414M 641M 493M Per Share 0.95 1.73 1.34 Return on Equity isn't a good measure here because the debt/equity ratio is high. And in this case, how much we want to play with intangibles is questionable, since we all agree that brands are a big part of this business, and the intangibles likely do represent some fraction or multiple of real value. Invested Capital was 3.54 billion at the end of 1998. So ROIC at the end of 98 was about 8% after charges, 12% before charges. Assuming a similar capital structure in prior years (a big and probably wrong assumption), the return would've been 7% and 18% in 1997, and 14% and 14% in 1996. This is return using operating cash flows, not free cash flows. It appears that Mattel typically spends about 200M/year in cap ex, and TLC spends about 25M/year, so that could be deducted from the above. As well, TLC typically has had tremendous working capital requirements that have actually knocked back operating cash flow significantly, to the tune of 90-100M/year at TLC. At Mattel, this has been a negative, but to a much lesser extent of say 25M/year. As well, Mattel spends relatively little on stock option and incentive plans, but TLC has been a big offender in that realm, and discloses that such plans would have lowered net income by an additional 53M in 1998, 39M in 1997, and 31M in 1996. All told, just these "smaller" issues add up to an additional approx 400M/year that comes out of operating cash flow. So cash return on the capital turns negative for 1998, falls by 2/3 in 1997, and remains barely positive in 1996. All said, though, I do really believe Barbie is fine. I kinda got on the wrong side of Mattel when I was chided for choosing Autodesk over Mattel. Fact is, I do think there is turnaround possible here. Lord knows I've invested in companies with good concepts and numbers worse than these. But, as with Disney, the story is a lot, lot more than "Mickey is fine." I think we can also file this as another example of how NI/ROE, as imperfect as they are, do often reflect the underlying story. Not that we shouldn't look behind them. Mike