3 Reasons MAT is Risky and 1 Stock to Buy Instead

Over the past six months, Mattel’s shares (currently trading at $16.62) have posted a disappointing 8.8% loss, well below the S&P 500’s 6.6% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Mattel, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Mattel Will Underperform?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid MAT and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Mattel’s sales grew at a weak 3.1% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Mattel has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.4%, lousy for a consumer discretionary business.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Mattel’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We see the value of companies helping consumers, but in the case of Mattel, we’re out. After the recent drawdown, the stock trades at 13.7× forward P/E (or $16.62 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Mattel

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