Raymond James initiates with Outperform May 11, 2017
With its Paw Patrol property “on a roll,” Raymond James analyst Kenric Tyghe believes a premium valuation is warranted for Spin Master Corp. (TOY-T) given its industry-leading growth profile.
He initiated coverage of Toronto-based toymaker Spin Master, which he called “a leading children’s entertainment (versus simply a toy) company,” with an “outperform” rating.
“The particularly strong momentum within key properties, combined with a diversified platform that is well positioned for growth (and a balance sheet that supports further strategic acquisitions), and strong execution, support our Outperform rating,” he said. “Spin Master’s Paw Patrol franchise is gaining global market and mind share, with other key properties in Hatchimals, Air Hogs, and Rusty Rivets also exhibiting very strong momentum through our forecast window. We believe that Spin Master’s 10-year sales CAGR [compound annual growth rate] of 14.0 per cent, which is a multiple of both the global toy industry’s (and key peers’) growth, highlights how effectively the team has managed to out play its peers, be it through being more innovative, better acquirers, or simply on trend. The bottom line is that they have (and continue) to get it more right (more often) than anyone else in the business, which in our opinion warrants a premium valuation (relative to the peer group). The Paw Patrol pups have legs, the Hatchimals are cracking the collectibles trend, and the option value on the Bakugan property (relaunch) is material.”
Mr. Tyghe emphasized the momentum behind its Paw Patrol property, its leading brand, which he said generated between 25–30 per cent of product sales (or approximately $350-million) in the 2016 fiscal year.
“Spin Master launched Paw Patrol in 2013, and today it is broadcast in over 160 countries and territories, and airs over 60 times a week on Nickelodeon,” he said. “Season 4 of Paw Patrol is currently on air (in North America) with Spin Master in production on Season 5 and Season 6. In Europe they are currently airing Season 2 and Season 3, and in China Season 1 launches later in 2017. Paw Patrol has received consistently high ratings, and was ranked the third highest rated pre-school TV program in 2016 and the number one show with kids 2–5 on all TV for 1Q17. Paw Patrol toys were launched in 2014, and received very positive customer response and generated robust sales. The successful creation of evergreen properties not only generates a stable stream of licensing revenues from broadcasters, but also creates very long toy life cycles (given the long lives of these shows, and the control they allow the owner to exert over the brand), at very attractive margins. Spin Master marries the toy and entertainment content when it produces a season of a new show, which creates an aspirational (‘I want’) element to the toys (with new toys, versions and characters, introduced in each new season).
Suggesting under the belief its ultra-successful Hatchimals line, a must-have toy for 2016, was “no one hatch wonder,” Mr. Tyghe said the company is poised for growth despite the struggles of the retail market, particularly south of the border.
“While retailer concentration in the U.S. toy business is worth noting, the Amazon effect is hard to ignore, with a recent report by One Click Retail, pegging Amazon’s share of the market at an eye popping 20 per cent in 2016. Amazon’s estimated 20-per-cent share reflected toy sales growth of 24 per cent to approximately $4.0-billion (versus growth of 4.7 per cent to $26-billion for the total U.S. toy market). In 2016, Wal-Mart, Target and Toys “R” Us accounted for 51.9 per cent of Spin Master’s Gross Product Sales (down from 57.4 per cent in 2015, and 62.8 per cent in 2014), while online sales represented 22 per cent. The top performing category by sales on Amazon is consistently Building Blocks (with nearly double the sales of the next closest category) which reported 19-per-cent growth in 2016, followed by Board Games with growth of 39 per cent. Rounding out the top 3 categories on Amazon are Boys’ Role Play and Action Figures according to One Click Retail data. Spin Master is well positioned given its portfolio mix (board games) and brand awareness (Paw Patrol, Hatchimals, etc.).”
Mr. Tyghe set a price target of $48 for the stock. The analyst consensus price target is $43.55, according to Thomson Reuters data.
“We apply a target EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 13.0 times to our 2018 estimated adjusted EBITDA of $262.4-million, which is at a premium relative to the U.S. peer group average of 10.4 times,” he said. “We believe Spin Master warrants a premium valuation relative to its US toy producer peer group given its higher sales and EBITDA growth trajectory. In addition, Spin Master’s material EBITDA margin expansion opportunity (due to operating leverage as the company grows its topline), is supportive of a higher EBITDA growth rate (further underpinning the case for a premium valuation).”