Stifel Spin Master Corp.’s recent share price weakness is “not justified and presents investors with an appealing entry point,” according to Stifel analyst Martin Landry.
The Toronto-based toymaker is down 13 per cent over the past month, “significantly underperforming” the S&P/TSX Consumer Discretionary index, which has seen a slid of just 1.5 per cent.
“Investors appear to be concerned with supply chain issues potentially impacting the company’s ability to have adequate stocks on the shelves for the upcoming holiday period,” said Mr. Landry in a research note. “We believe these concerns are overblown based on positive comments recently made by peers and based on Spin Master’s recent investor meetings. TOY trades at a forward EV/EBITDA of 9 times, an appealing valuation given the company’s expected growth prospects and a discount of 18 per cent vs Mattel and Hasbro. According to our estimates, TOY is on track to generate its highest annual EBITDA on record, at $345-million, up 14 per cent from the previous high reached in 2018.”
The analyst believes Spin Master is poised to meet or exceed its 2021 guidance after its management reiterated confidence in the company’s financial targets during recent investor meetings.
“In our view, management had enough visibility at that time to account for most logistical issues,” he said. “We also believe the team wants to start building a strong track record under the new leadership, and hence, has taken the right steps to ensure a positive outcome. In addition, digital games and entertainment, which represent more than 20 per cent of total revenues, and a higher proportion of EBITDA, are not impacted by supply chain issues.”
Maintaining his own financial targets, despite acknowledging the impact of increased freight costs, rising resin prices and the global microchip shortage, Mr. Landry reaffirmed his “buy” rating and $58 target for Spin Master shares. The current average on the Street is $54.09.
“Now with operational issues largely behind the company, we have higher confidence in the ability for TOY to return to and potentially exceed historical levels of profitability. Shares of Spin Master are currently trading at a 18-per-cent discount to toy industry peers Mattel and Hasbro on an EV basis, which we think is too wide given Spin Master’s clean balance sheet and our expectation for Spin Master to grow EPS and EBITDA faster,” he said.