Spin Master Corp.

Spin Master (TSX: TOY) is Canada’s leading children's entertainment company. The company has a strong portfolio of traditional and digital toys, games, products and entertainment properties. Spin Master stock has plunged more than 61% and is trading cheap with negatives priced in.

Why the decline in stock: Unmatched demand destruction and negative market sentiments weighed on Spin Master stock. Besides, weak financial performance and guidance rollback played spoilsport. Moreover, supply-chain disruption further kept investors at bay. Earlier, the company stated that its second-quarter shipments could take a hit due to the COVID-19 outbreak.

Recent development: On March 19, Spin Master announced that it is withdrawing its 2020 outlook regarding the gross product sales and adjusted EBITDA margin amid the rapid rise in COVID-19 cases. Earlier, the company forecasted mid-single-digit decline in gross product sales. Meanwhile, EBITDA margin was expected to stay even with the prior year.

Financial performance: Spin Master disappointed with its FY19 financial performance. In FY19, Spin Master reported gross product sales of US$ 1691.2million, down 1% year-over-year. Meanwhile, revenues fell 3.1% year-over-year to US$ 1,581.6 million on account of decline in gross product sales, lower other revenues and higher sales allowances. Adjusted EBITDA decreased 13.8% to US$ 219.0 million as lower sales, decline in gross profit dollars and higher distribution and selling expenses took a toll on it. However, a decline in administrative expenses supported adjusted EBITDA. Spin Master’s adjusted net income came in at US$ 92.8 million, implying a year-over-year decline of 43.2%.

Key Financial Highlights (Source: Company Financials)

Valuation Method: P/E Based Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: While the decline in the Spin Master stock was due to good reasons, the sharp fall makes it attractive long-term bet. We expect low demand and supply-chain headwinds to pressure the stock in the near-term. However, both the issues are transitory and are likely to abate in the coming quarters. We expect Spin Master to gain from its robust portfolio of innovative toys and games, which provides it with a competitive advantage over peers. For instance, Spin Master’s gross product sales fell 1% in 2019, as compared to an industry-wide decline of 3%. Though sales could remain muted in the near-term, the company’s focus on cost and productivity savings are likely to cushion margins, which is comforting. Shares of Spin Master are trading at a discount when compared to the peers. We have valued the TOY stock using relative valuation method, i.e., P/E based approach and arrived at a target price with an upside of low double-digit (in percentage terms). We give a “Buy” recommendation on the stock at the current market price of CAD 15.13, up ~7.2% on April 6, 2020.

TOY 1-year Daily Price Chart (Source: Thomson Reuters)

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