This Canadian Stock is Over 30% Undervalued

A box-office success doesn't always mean blockbuster returns for investors - and this Canadian toy maker is still undervalued. 

Ruth Saldanha 14 November, 2023 | 1:39PM
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Key Morningstar Metrics for Spin Master Stock

Ruth Saldanha: Toy makers have been in the news recently not least because of the movie releases by toy brands. The top grossing movie of 2023 so far was Barbie – based on the doll owned by toy company Mattel (MAT). The Barbie movie earned more than $1.4 billion this year, but this did not necessarily translate into a blockbuster for investors in the company, as we think Mattel stock is still undervalued. However, the stock we want to talk about today, isn’t Barbie – or Mattel, but is a Canadian toy maker, that had a movie out this year, and is trading at a 31% discount to our fair value estimate. The stock is Spin Master.

Spin Master Has Been Hit by Consumer Spending Weakness

Toronto-based Spin Master – Ticker TOY – has not escaped the recent spending weakness that has plagued the consumer discretionary landscape. The company, which owns popular brands like Paw Patrol and Hatchimals, recently acquired Melissa and Doug.

Morningstar analyst Jamie Katz expects a weaker near-term outlook for gross product sales that will persist into 2024, and expects to lower her fair value estimate for the stock, but still thinks the stock is undervalued. She thinks the full decline will be partially offset by the addition of Melissa & Doug, which has added roughly $450 million in projected 2024 sales.

She adds that last quarter, Spin Master gross product sales rose a strong 10%, but entertainment impressed, rising 71% thanks to Paw Patrol’s movie release. She thinks the firm can lean on inventor innovation, bolt-on acquisitions, and emerging markets growth to drive sales increases. All in all, the company is trading at a 31% discount to her fair value estimate right now, making it a cheap bet. For Morningstar, I’m Ruth Saldanha.

 

bullsSpin 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 Dora the Explorer licenses are evidence it can attract important partnerships.

 

 

bears Spin Master Stock Bears Say

  • The target market for traditional toy manufacturers continues to face rising digital content preferences, require consistently robust 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 Voting28.44 CAD-2.07Rating

About Author

Ruth Saldanha

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

 
 
 

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