After reporting earnings last week that were more than 84% lower than what analysts expected, shares of the California-based toymaker have slid 15%.
In premarket action Friday, Nov. 3, Mattel stock gained 1.2% to $13.20 after DA Davidson upgraded it to "neutral" from "underperform." After the open, shares continued to show gains.
According to DA Davidson, Mattel's stock has absorbed most of the negative developments following last Thursday's earnings flop. In the third quarter release, Mattel posted a 51% decline in operating profit and suspended its 60 cent-per-share dividend.
"We are by no means turning positive, as our 4Q17, 2018 and 2019 EPS estimates are all still below consensus," analysts wrote. "However, we do view MAT's aggressive 2-year cost reduction program and plans to reduce SKUs as steps in the right direction, and we like the 'take charge' tone of new CFO Joe Euteneuer."
The cost reduction plan that bolstered some confidence in analysts sees $650 million in cost savings over two years. About one-third of the effort will happen in 2018, and the rest will take place in 2019. Of the slashed costs, Mattel wants to reinvest $170 million.
DA Davidson also commended Mattel for its structural simplification. The company trimmed its brands by 30% in 2017 and will cut back on product launches by 20% in 2018. Mattel will also reduce time to market for new toys by 50%, slashing the 12 to 18 months it currently takes to get a new product on shelves.
Finally, Mattel isn't a likely takeout candidate anymore, DA Davidson wrote. "While MAT does have some valuable consumer products brands, it is not an 'IP Powerhouse' currently, in our opinion...We think Barbie and Hot Wheels would NOT be appealing to an entertainment or media conglomerate in the same way that Disney (DIS - Get Report) wanted Marvel and Lucasfilm."
DA Davidson placed a 12- to 18-month price target of $12 on Mattel, implying an 8% downside for shares. In the next five years, DA Davidson sees stock gaining to $18, which is about 40% higher than Mattel's closing stock price of $13.04 Thursday, Nov. 2.
More of What's Trending on TheStreet: