There are not too many companies out there that sell products that have been popular across multiple generations, but Mattel (Nasdaq:MAT) is one of them. In many respects, Mattel looks like an excellent company - it offers beloved brands, a strong return on capital and respectable margins. The question for shareholders, though, is whether management is willing to take the sort of risks that will be necessary to really improve growth, and make this more than a steady dividend play.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Solid Third Quarter Results
On the whole, Mattel delivered neither a positive surprise nor a disappointment for the third quarter. Revenue rose about 9% as reported, with 7% growth when measured in constant currency. Domestic growth was a bit softer than international (6% versus 8%), but balanced all the same. Although the company's Fisher-Price business saw a little revenue erosion on a constant currency basis, the Barbie franchise saw 13% growth.

However, Mattel did do surprisingly well with its margins. Gross margin fell more than three full points, with almost half of the impact coming from foreign currency. Still, given what is going on in packaging, resins and other inputs, Mattel is managing its cost structure quite well. Mattel also posted nearly 11% growth in operating income as the company continues to do a very good job of managing internal expenses.

Waiting for the New, New Thing
While this quarter's performance, from the Barbie line, would suggest that the company can still produce its own growth, a lot of the upside seems to come from licensed properties. A strong relationship with Disney (NYSE:DIS) has produced a steady stream of winners, but the movie tie-in business is notoriously unpredictable. Time Warner's (NYSE:TWX) next "Batman" movie should be a slam-dunk for merchandising, but the "Green Lantern" was a surprising flop.

Mattel is trying to build new brands, but it takes time. Maybe Monster High can be the next Barbie or Hot Wheels, but the odds aren't very good. Consequently, investors have to make their peace with a business model that is balanced between slow-and-steady multi-generation brands and hit-or-miss licensed tie-ins. Making matters worse, Hasbro (Nasdaq:HAS) and Jakks Pacific (Nasdaq:JAKK) are always out there looking for their own deals, so it's not as though Mattel has the pick of the litter whenever it pleases.

Too Conservative for Its Own Good?
Mattel management deserves a lot of praise for how it runs this business. When it comes to "blocking and tackling" functions like reducing overhead, controlling production costs and ironing out distribution snags, Mattel generally does well and the returns on capital show it.

Where Mattel may have a longer-term problem, though, is in its risk appetite. Mattel's acquisition of The Learning Company was an unmitigated disaster, and the company has seemed to shy away from big moves since then. The risk, then, is that the company plays its cards too close to the vest and lets growth opportunities slip away.

Why does this matter? Well, the Bratz line of dolls did some real damage to Mattel, before it was able to score some victories in court on the basis of contract exclusivity with the doll's designer. Winning in court is not the same as winning in the market, and Mattel can't just rest on its laurels and assume its classic line-up will stay popular.

The Bottom Line
For the most part, the risks that Mattel faces are known by the Street - risks that tie-ins will flop, risks that products may be unsafe and require recall and risks that new, hot products draw away consumer dollars. Mattel has been in business long enough, though, that most investors are likely not too bothered by any of those issues.

The question for shareholders is whether there's enough growth left in this business to validate a purchase. The dividend looks safe and Mattel looks like a company that can grind on through the good and bad times. But, is Wall Street willing to pay for that quality and reliability? Absent the ability to drive better growth, this is a decent hold but not a very compelling buy. (For additional reading, take a look at How Companies Create A Brand.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center