StreetBeat: Mattle Inc.
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Continued from: mattelstock.htm
Briefing.com: Can you comment on the difficulties Mattel is
experiencing integrating The Learning Company? Is that a function of poor industry
fundamentals, poor management, or both?
Sean McGowan: TLC's main problems boil down to these three: First,
growth in unit sales has been driven by price discounting, which has hurt margins. This
began long before Mattel bought them, but has accelerated. Second, TLC's management was
spending too little on R&D, leaving them with "tired" products that were not
competitive. And the third issue is that some of TLC's customers turned out to be poor
credit risks.
Tony Gika: We don't necessarily think we have all the answers yet on
what happened at The Learning Company. One issue is that there is slowing PC software
demand and the company got caught shipping a little too much product. We do feel there
were management issues at both Mattel and The Learning Company, and that these issues
should not be blamed on just one unit. Mattel management needs to step up and take some of
the responsibility for issues at TLC.
Mattel is a very valuable business with numerous global brands and
key underlying businesses waiting to be unlocked. This is a company with unbelievable
potential, and Mattel just needs the right management team with the right strategy, vision
and ability to execute.
Briefing.com: What is your outlook for this stock next year?
Sean McGowan: I have Mattel rated "HOLD." I believe the
stock is cheap, but until a number of issues are resolved, the uncertainty will probably
hold it down. Among these uncertainties are whether or not we have seen all the bad news
out of TLC, and how Mattel's depleted management ranks will be restocked. This could take
several months to clear up.
Tony Gika: Our view has been tempered in recent months, but we are
optimistic long-term. Whether it's this management team or another remains to be seen, but
we are optimistic do regarding a turnaround in the 12-18 months. In general, investor
interest has been low due primarily to earnings disappointments, The Learning Company
issues, slow earnings growth and a slow growth industry. These issues are wearing on
investors, and they are tired of seeing no swift action to turn this company around. At
the same time, it is very difficult for a traditional toy company to see quick turnaround
results. This is roughly a 5% growth per year industry, and that makes it tough to turn
around on a dime.
We remain optimistic long term, and continue to rate the stock
"buy" with a 12-month price target of $18-20.
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