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Will This Downgrade Hurt Mattel (MAT) Today?

Story updated at 10 a.m. to reflect market activity.

NEW YORK (TheStreet) -- Mattel (MAT) was downgraded to "underperform" from "market perform" by BMO Capital Markets Monday.

Shares of Mattel fell 2.3% to $38.49 in morning trading.

The firm cut its price target for the toy maker to $33 from $40. BMO analyst Gerrick L. Johnson sees a risk to consensus earnings expectations.

"We are downgrading shares as we see risk to MAT's earnings estimates for 2014 and 2015 owing to cyclical declines in core product lines like Barbie and Hot Wheels, deteriorating sales of Monster High, and disappointing performance of new lines like Max Steel and Ever After High," Johnson wrote. "The toy market in mature markets continues to be weak, while emerging markets face challenges from declines in equity markets and weakening currencies. Finally, we think there could be risk to MAT's gross and operating margins owing to mix, lack of sales leverage, and an exhaustion of cost savings opportunities. MAT shares could experience some support owing to its 3.8% dividend yield. However, should earnings continue to deteriorate, even with downside support from its dividend, we believe MAT shares will still find themselves in the proverbial doghouse and underperform the overall market and publicly traded peers."

Must read: Warren Buffett's 10 Favorite Growth Stocks

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Separately, TheStreet Ratings team rates MATTEL INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MATTEL INC (MAT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, notable return on equity and compelling growth in net income. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analyss by TheStreet Ratings Team goes as follows:

  • MATTEL INC has improved earnings per share by 23.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, MATTEL INC increased its bottom line by earning $2.60 versus $2.21 in the prior year. This year, the market expects an improvement in earnings ($2.63 versus $2.60).
  • The current debt-to-equity ratio, 0.49, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, MAT has a quick ratio of 2.20, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for MATTEL INC is rather high; currently it is at 56.68%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 17.47% is above that of the industry average.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. In comparison to other companies in the Leisure Equipment & Products industry and the overall market on the basis of return on equity, MATTEL INC has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • MAT, with its decline in revenue, slightly underperformed the industry average of 0.1%. Since the same quarter one year prior, revenues slightly dropped by 6.3%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: MAT Ratings Report

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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