Why is Spin Master Stock So Cheap?

The Toronto-based company which owns Paw Patrol and Hatchimals is trading at a 30% discount to our fair value estimate.

Ruth Saldanha 21 July, 2023 | 1:45AM
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Key Takeaways on Spin Master Stock

  • The company owns popular brands like Paw Patrol and Hatchimals
  • It has 2% market share of the $100 billion global toy industry, but has no economic moat
  • It is currently trading at a 30% discount to Morningstar's fair value estimate 

 

Ruth Saldanha: Nearly two decades since its inception in Toronto, toy maker Spin Master (TOY) – which owns popular brands like Paw Patrol and Hatchimals – has amassed about a 2% share in the fragmented, more than $100 billion global toy industry.

The company has a multifaceted plan for growth focusing on innovation in toys and digital games, higher penetration of overseas markets (which composed around 40% of 2022 sales), the pursuit of strategic acquisitions, and the development of evergreen global entertainment properties. This leads Morningstar analyst Jaime Katz to believe that Spin Master has the ability to grow into new products and geographies.

She thinks Spin Master is set to generate average free cash flow to equity of around $220 million over the next five years, facilitating investment in its operations while maintaining the flexibility to strategically add assets to its mix.

However, she warns that the firm has failed to amass an edge, and therefore it has no Economic moat, unlike its narrow-moat peers Mattel and Hasbro. Plus, given Spin Master’s low market share, Katz doesn’t think the company has the negotiating scale to warrant a cost advantage.

Spin Master can lean on inventor innovation, bolt-on acquisitions, and emerging markets growth to drive sales increases. Ultimately, Katz thinks this leads to an operating margin of 13% in 2027, above the 10% average the company has delivered over the past five years. For now, she is maintaining her $50 fair value estimate for the company, which is currently trading at a 30% discount.

For Morningstar, I’m Ruth Saldanha.

 

bulls Spin Master Stock Bulls Say

  • Solid third-party inventor relationships allow as many as 30-50 ideas to be commercialized every year, at low royalty levels, elevating the level of innovation the firm could achieve on a stand-alone basis.
  • Financial flexibility and the willingness to pursue acquisitions could lead Spin Master to tie-ups that drive faster sales growth than we currently forecast.
  • Spin Master's ability to capture entertainment and licensing contracts could generate faster than expected sales. The win of the DC Comics boys and Supercross licenses are evidence it can attract compelling partnerships.

bears Spin Master Stock Bears Say

  • The target market for traditional toy manufacturers continues to shrink, and digital content preference require consistently successful innovation.
  • The consolidated retail channel leaves Spin Master at the mercy of its largest outlets (its top three retailers account for 51% of 2022 sales), which could affect profits, depending on demand for promotional spending from key retail partners.
  • Spin Master competes with larger peers Mattel and Hasbro, which have deeper pockets for promotional and advertising spend and the resources to negotiate for more shelf space at retailers.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Spin Master Corp Shs Subord Voting30.61 CAD-1.45Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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