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Non-Tech : MAT - Mattel - toysRthem -- Ignore unavailable to you. Want to Upgrade?

To: John Finley who wrote (570)	5/31/2000 4:27:00 PM
From: Tom Caruthers	Read Replies (1) \| Respond to of 706

Don't know if you guys are paying attention or not... Almost half a million shares traded in the last 5 minutes on a strong uptick siliconinvestor.com Looks like possible good news on the horizon. Tom

To: John Finley who wrote (570)	5/31/2000 4:55:00 PM
From: Duker	Read Replies (1) \| Respond to of 706

In search of rational thought ... I was thumbing through a Sell Side note on MAT the other day. The report was a standard 'initiation of coverage' tome (I will not name the firm associated with this note, though Ron Chernow chronicled its history in his 1991 book). A great deal of time was spent describing just how wonderful Barbie is/was. "Simply stated, Barbie is the best toy brand ever built." The analyst estimated Barbie's 1999 revenues at $1.5bn (~32.5% of MAT revenues). The analyst highlighted some Buffett-ish factoids (I am thinking of Buffett's little KO or G quips ... e.g., "Over ONE BILLION on 8 oz. Servings of Coke are consumed each day."): Placed head-to-toe, Barbie dolls and their friends sold since the doll was introduced in 1959 would circle the globe eight times ... the average American girl aged 3-11 owns nine Barbie dolls ... in the UK, France and Germany, girls own an average of seven Barbie dolls ... The average American girl receives three dolls per year ... the average European receives two ... etc. Overall, it was an interesting read. Nice story, as they say in the business. Then I read to the italicized statement in the sidebar: " ... and we estimate [Barbie's] value at $6 per share." Time to do the math. MAT (according to the report) has 425.5mm shares outstanding. Thus, Barbie is worth $2.55bn using this $6/share analysis. Pretty impressive for a piece of plastic in a box! What a huge, sound-byte-quality number!!! $6 for Barbie and you only shell out $5 (at the time) for the rest of MAT (some $3.3bn in forward sales)!!! Could this be even remotely possible? Conveniently, there are supporting numbers. The analyst estimates that Barbie (on a standalone basis) would earn (i.e., after tax, net income) $523.3mm in FY2001. The analyst also assumes (probably correctly?) that Working Capital requirements are minimal, and Depreciation is roughly equivalent to Capital Expenditures. Which is to say, the Net Income of $523.3mm in FY2001 is a pretty solid approximation of free cash flow. I think a businessperson would be willing to pay $2.553bn or 4.88 x's free cash flow for Barbie, wouldn't you? Can anyone on the Sell Side see the forest through the trees? This is one of the manifold problems with sell side research. 32 pages of so-called analysis and the single biggest valuation driver, The Barbie Analysis, is utterly ridiculous. Of course a businessperson would pay 4.88 x's free cash flow for Barbie. That equates to a 20.5% free cash flow yield. Are you kidding me? People buy crappy real estate properties at an 8% cap rate. Trash haulers trade at 5x's cash flow (that's before Taxes and Depreciation!). UGGGHHHH!!! On one page the analyst says Barbie is the best toy brand ever built. The model the analyst uses to estimate Barbie's net income reveal net margins (yes, net after tax margins) north of 31% (ain't many companies that can churn out 30% plus net margins on $1.5bn in sales). The returns on invested capital at Barbie are through the roof. 4.88x's forward cash flow? I would argue that even the most tightfisted business person would pay AT LEAST twice this amount for such a wonderful franchise. Sure, the analyst may overestimate Barbie's profitability, but to use such a ridiculously low multiple is just plain thoughtless. Draw your own conclusions about the accuracy of this analyst's estimates, but suffice it to say that one would think that if these estimates are accurate, Barbie is worth a whole lot more than $6 per share. --Duker