Options Trade – Mattel, Inc. (NASDAQ:MAT) Puts
Wednesday, April 16, 2014

**OPTIONS TRADE: Buy the MAT Jul 2014 35.000 put (MAT140719P00035000) at or under $0.85, good for the day. Place a protective stop limit at $0.35 and a pre-determined sell at $1.70.

by Ian Harvey

April 16, 2014

Introduction

Toymaker, Mattel, Inc. (NASDAQ: MAT) will announce its first-quarter FY 2014 earnings on Thursday, April 17, 2014, at 6:00 am (EST).

The stock has been a poor performer in 2014, mainly due to a weak Q4 report, and is currently down 18.3% on the year. Analysts expect first quarter earnings of $0.08 per share, down from $0.11 in the same period last year.

Mattel has been suffering a downward spiral due to a previous disappointing quarter and is not expected to provide much positive news for the new earnings report. Since the overall trend is away from traditional toys in favor of online games and mobile gaming, which is something that Mattel has yet been able to master. The company is dealing with declining sales for its biggest brands Barbie, Fischer Price, and Hot Wheels, and until it is able to boost sales of these brands the stock is going to remain depressed. An earnings beat could add a little strength to the stock, but the long-term outlook will remain weak regardless of any positive earnings surprise.

Company Details

Mattel, Inc. (Mattel) designs, manufactures and markets a variety of toy products worldwide which are sold to its customers and directly to consumers.

Mattel’s portfolio of brands and products are grouped in categories, such as Mattel Girls & Boys Brands, including Barbie fashion dolls and accessories (Barbie), Polly Pocket, Little Mommy, Disney Classics, and Monster High (collectively Other Girls Brands), Hot Wheels, Matchbox, and Tyco R/C vehicles and play sets, and CARS, Radica, Toy Story, Max Steel, WWE Wrestling, and Batman, and games and puzzles; Fisher-Price Brands-including Fisher-Price, Little People, BabyGear, Imaginext, and View-Master, Dora the Explorer, Go Diego Go!, Thomas and Friends, Mickey Mouse Clubhouse, Sing-a-ma-jigs, and See ‘N Say, and Power Wheels, and American Girl Brands, including My American Girl, the historical collection, and Bitty Baby.

American Girl Brands products are sold directly to consumers via its catalogue, Website, and retail stores.

Key Statistics for MAT

Current P/E Ratio (ttm) 15.1476
Estimated P/E(12/2014) 14.5903
Relative P/E vs. SPX 0.8905
Earnings Per Share (USD) (ttm) 2.5390
Est. EPS (USD) (12/2014) 2.6360
Est. PEG Ratio 1.4590
Market Cap (M USD) 13,067.00
Shares Outstanding (M) 339.76
30 Day Average Volume 3,703,861
Price/Book (mrq) 4.0133
Price/Sale (ttm) 2.0328
Dividend Indicated Gross Yield 3.95%
Cash Dividend (USD) 0.3800
Dividend Ex-Date 02/18/2014
5 Year Dividend Growth 14.25%
Next Earnings Announcement 04/17/2014

Technical Analysis

MAT was recently trading at $38.47, down $10.01 from its 12-month high and just $3.49 above its 12-month low. Technical indicators for MAT are bearish and the stock is in a weak upward trend. The stock has support above $38.07 and resistance below $40.79.

Earnings

Mattel (NYSE:MAT) last issued its quarterly earnings data on Thursday, January 30th. The company reported $1.07 EPS for the quarter, missing the Thomson Reuters consensus estimate of $1.21 by $0.14. The company had revenue of $2.11 million for the quarter, compared to the consensus estimate of $2.38 billion.

During the same quarter in the prior year, the company posted $1.12 earnings per share. The company’s quarterly revenue was down 6.3% on a year-over-year basis. On average, analysts predict that Mattel will post $2.64 earnings per share for the current fiscal year.

In the current quarter, Mattel Inc. is expected to report earnings of $0.07 a share. At close of trading session on Wednesday, April 9, 2014, the company's P/E ratio stood at 15.15.

Continued Downward Movement

Volume/Sentiment – Overall, options traders are gambling on a pullback for the shares, with puts trading above the normal pace with short-term options growing increasingly popular with volume outstripping open interest -- all signs of newly bought bearish bets.

A look at the previous day’s options trades gives a more mixed picture showing that calls have exceeded the put volume for this particular day, but the put prices have increased showing that interest is more applicable….

There are several catalysts that may affect the movement of this stock:-

1. Earnings report due --- previously discussed.

2. Analysts downgrade --- BMO Capital Markets downgraded Mattel from a “market perform” rating to an “underperform” rating and currently have a $33.00 price target on the stock, down from their previous price target of $40.00. BMO Capital Markets’ price target would indicate a potential downside of 16.26% from the stock’s previous close.

3. Senior managers in the Indian operations, which also included the country head Karen Gera, quit, which upsets the confidence among stakeholders.

Analysts Opinions

Mattel (NASDAQ:MAT) was downgraded by BMO Capital Markets from a “market perform” rating to an “underperform” rating in a research note issued on Monday, 7th April, 2014. They currently have a $33.00 price target on the stock, down from their previous price target of $40.00. BMO Capital Markets’ price target would indicate a potential downside of 16.26% from the stock’s previous close.

BMO analyst Gerrick L. Johnson sees a risk to consensus earnings expectations.

"We are downgrading shares as we see risk to MAT's earnings estimates for 2014 and 2015 owing to cyclical declines in core product lines like Barbie and Hot Wheels, deteriorating sales of Monster High, and disappointing performance of new lines like Max Steel and Ever After High," Johnson wrote. "The toy market in mature markets continues to be weak, while emerging markets face challenges from declines in equity markets and weakening currencies. Finally, we think there could be risk to MAT's gross and operating margins owing to mix, lack of sales leverage, and an exhaustion of cost savings opportunities. MAT shares could experience some support owing to its 3.8% dividend yield. However, should earnings continue to deteriorate, even with downside support from its dividend, we believe MAT shares will still find themselves in the proverbial doghouse and underperform the overall market and publicly traded peers."

Also, the company has been the subject of a number of research reports:-

• Analysts at Zacks reiterated a “neutral” rating on shares of Mattel in a research note on Thursday, March 27th. They now have a $41.00 price target on the stock.

• Separately, analysts at SunTrust downgraded shares of Mattel to a “neutral” rating in a research note on Friday, February 28th.

• Finally, analysts at Argus downgraded shares of Mattel from a “buy” rating to a “hold” rating in a research note on Friday, February 14th.

Two equities research analysts have rated the stock with a sell rating, eight have assigned a hold rating and three have assigned a buy rating to the company’s stock. The stock currently has an average rating of “Hold” and a consensus target price of $43.25.

Conclusion

The stock has managed to make back some of its losses over the last month, but there is very limited upside at the current time. An earnings beat could add a little strength to the stock, but the long-term outlook will remain weak regardless of any positive earnings surprise. On the other hand, there is plenty of downside risk given the stock's recent weak upward trend.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the MAT Jul 2014 35.000 put (MAT140719P00035000) at or under $0.85, good for the day. Place a protective stop limit at $0.35 and a pre-determined sell at $1.70.



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