Bears see trouble for famed toymaker
09/12/17

Is change good? It depends on who you ask.

After all, new technology has propelled a whole universe of companies from Silicon Alley into record territory this year. Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB), Amazon.com (AMZN)–we all know them. Shifts in the global economy have also created new winners from Beijing to Brazil and Buenos Aires: Alibaba (NASDAQ: BABA), Petrobras (NYSE: PBR), and MercadoLibre (NASDAQ: MELI).

But history hasn’t been kind to everyone. A subset of laggards has emerged–businesses struggling to adapt to the 21st century’s shifting economic, social, and cultural trends. 

Traders first played the trend by hammering retail. Capital also fled old-line telecoms like AT&T (NYSE: T) and Verizon (NYSE: VZ) in favor of wireless pioneers like American Tower (NYSE: AMT) and Crown Castle (NYSE: CCI). And just last week, investors revolted against the cable-television fortress after Walt Disney (NYSE: DIS) and Comcast (NYSE: CMCSA) issued warnings.1

Monday saw more of the same in another company that’s had trouble adapting to the digital world: Mattel (NASDAQ: MAT), owner of iconic brands like Barbie, Hot Wheels, and Fisher Price. Going to work about an hour into the session, traders purchased a block of 5,500 13-October 15 puts for $0.40. That was big enough to push total options volume in the toymaker to three times last month’s daily average.

Puts fix the price where a security can be sold, so they can make money when a stock falls. Yesterday’s contracts, for instance, will double in value if MAT declines 9 percent to $14.20 and triple from an 11 percent slide to $13.80. They’ll break even at $14.60 but go worthless if the shares remain above $15 by expiration.

Mattel (MAT) 1/3/17 - 9/11/17 chart

Source: OptionsHouse by E*TRADE.

MAT rose 1.96 percent to close Monday’s session at $15.58, but has lost more than 40 percent of its value this year. It’s also sunk to levels last seen in mid-2009 after plunging on four separate bad-news surprises since January.2 On top of that, European competitor Lego slashed jobs to cope with weak demand just last week.3

Debt is another potential concern–at least if you ask bean counters in the bond market. “Mattel's efforts to restore profit margins and reduce leverage will take longer than originally expected,” Moody’s glumly stated earlier this year as it cut MAT to within two notches of junk.4 That puts it in a similar boat with other former stalwarts in the retail, telecom, and media sectors that ran up IOUs when times were good but are now struggling to pay the piper.

Bottom line: MAT has taken a beating along with other old-economy names, and some traders see further downside risk.

 

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1. Reuters: Disney, Comcast shares fall on disappointing forecasts. 9/7/17.

2. Marketwatch: Mattel shares sink in after-hours trading after earnings and sales miss. 1/25/17. Reuters: Mattel cuts sales forecast after inventory overhang slams results. 4/20/17. Marketwatch: Mattel's stock sinks after growth outlook lacks clarity, specifics. 6/15/17. Reuters: Barbie maker Mattel's profit, sales miss estimates. 7/27/17.

3. Bloomberg: Lego Cuts 1,400 Jobs Due to Weak Demand. 9/5/17.

4. Moody's Investors Service: Rating Action: Moody's downgrades Mattel to Baa2; affirms P-2; outlook stable. 3/20/17.