Company Profile: Spin Master Corp.

TOY: TSE

I have picked a timely company this week in Spin Master Corp. (Spin Master). Spin Master is a toy and entertainment company that produces many major hit toys, games and television shows that will all be a hit this time of year. Looking through their product line, I can personally say my children have owned or tried many of their products. Paw Patrol is plastered over a ton of stuff she has brought home from various parties in the last year. We have also given out many Paw Patrol items as presents.  The Zoomer robot animals were on the Christmas list last year but never received. Hatchimals are huge as well with kids around 8 years of age (won 2017 “Innovative Toy of the Year at the North American International Toy Fair).  The list goes on:  Kinetic Sand (been there, done that and had it all over our house), Build-a-Bear (my daughter is a huge fan), Chubby Puppies (have at least one of these lying around), Zhu Zhu Pets (have to love toys that look like rodents hanging about), Little Charmers, Hedbanz (don’t own this but the kids have enjoyed playing it elsewhere), Etch A Sketch (old school fun), etc. The list goes and I must say, the 7-11 at- home Slurpee machine does look pretty cool as does the Rube Goldberg device game! Check out their website and see all of the products and games they sell. Impressive portfolio!

 Courtesy of Spin Master Corp. website

Courtesy of Spin Master Corp. website

 

·      As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer.  Also, I do not own Spin Master stock and am not affiliated with them in any manner.    

What is Spin Master Corp.?

Spin Master has its roots in Canada. It was started by two childhood friends after they graduated from business school. Their springboard product was an Earth Buddy which consisted of a nylon stocking covered head of sawdust topped with grass seeds which grew to emulate hair. Sounds like a Chia Pet to me! The Earth Buddy was very successful and from that, the company has grown into a leading child’s entertainment company. A real Canadian success story! Another early hit product in the late ‘90’s was the Air Hogs brand which allowed children to fly the toy by themselves with limited assembly.  Fast forward to 2007 and the company launched the Bakugan brand which as you may recall was a huge success.

As stated on its website, since 2001, Spin Master toys have received 92 Toy of the Year Award nominations with 25 total wins. Paw Patrol and Little Charmers have also been recent huge successes for the company. The company knew it needed a “wow” factor in all their toys in order to compete with the big toy giants.

The following information taken from the company’s November 2017 Investor Presentation is also interesting and relevant:

·      In 2016, 37% of sales were in the pre-school and girls segment, 27% was in activities, games & puzzles and fun furniture, 23% in remote control and interactive characters, 12% in boys action and high tech construction and 1% in outdoor (this followed the acquisition of Swimways (a Virgina based company selling water toys, pool floats, pool games, etc.));

·      Global toy sales are expected to increase 4% in 2017;

·      Global traditional toy and games market was $85.2 Billion in 2016. North America consists of 30% of that market leaving 70% of the market outside of North America. However, the Middle East and Africa have a projected 13% growth rate in this space;

·      In the US, games and puzzles are expected to grow the most. This is interesting and somewhat unexpected;

·      Not surprisingly to all of us parents, children’s play and entertainment platforms are converging with technological advancements and smart devices playing a larger role so the company is taking heed of these trends;

·      Spin Master’s growth strategy consists of: 1. Innovating across their portfolio of toys and games, 2. Developing popular, long lasting programming including a commitment to develop at least one new show a year (I would say this goal is quite impressive!) 3. Increase sales in developing and emerging markets and 4. Make strategic acquisitions to consolidate the industry and leverage the global platform;

·      Spin Master leverages a global base of inventors. It has approximately 200 inventors globally, translating to approximately 3000 ideas per year with 30-50 of those ideas commercialized per year and 3-5% net royalties paid on the net sales;

·      Spin Master owns the licences of various IP (Intellectual Property) to use such in products like Star Wars, Disney Princesses, Trolls, etc.;

·      Its revenue stream consists of various options including: selling to traditional retail places like Target, selling to a third party distributor to distribute the products, licensing its IP to a third party, licencing to broadcasters (in the case of its TV shows) or selling mobile apps.

I am impressed with Spin Master’s commitment to new products and its goal of aiming high for hit products that resonate with kids. They certainly have a proven track record in that regard. However, it would seem to me that toys and the interests of children are fickle and any company in this space would have to be on top of changing trends like in almost no other industry. Constantly inventing hit products would no doubt be a top priority. In this respect, Spin Master looks like it is highly committed to this goal judging from its investor presentation.

What is Spin Master’s stock doing?

As at December 21, 2017, the numbers from our basic stock evaluation tools are as follows:

Share price: $52.30 USD

One share of Spin Master will cost you $52.30 USD.  The price over the past 52 weeks has ranged from $30.01 to $54.54.

Price to Earnings (P/E): 28.9 TTM (Trailing Twelve Months)

Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued.  The industry average here according to Morningstar is 18.8. To put this figure into perspective, the market is giving Spin Master’s stock a value equal to 28.9 years of its earnings. So, Spin Master is slightly higher than the industry norm.

Dividend Yield: --

Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. Here, Spin Master is not paying a dividend as of yet.

Earnings per Share (EPS): $1.42 TTM

This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. 

Spin Master’s EPS has remained relatively steady and is slightly higher than last year.

Revenue: $1.449 Billion TTM

Increasing revenue is a good sign that the company is growing. Spin Master’s Revenue in 2015 was $879 Billion and in 2016 was $1.154 Billion so it is a steady progression.

Return on Equity (ROE): 36.1 TTM

ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. Here, Spin Master has seen a drop in ROE since 2015 (where it was 131.75) and a drop from 2016 (where it was 41.29).

Market Capitalization: $5.3 Billion

This indicates Spin Master is a medium cap stock. Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies. Medium caps fall somewhere in the middle being a mix. 

Net Profit Margin: 9.9 TTM

This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin.

Cash Flow per Share: 0.37 (end of 2016)

Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position. 

This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, ie. “fixed assets”) that required large amounts of cash. Spin Master has a low value on this metric.  

Price to Sales (P/S): 2.9 TTM

This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the industry average is 1.2 so Spin Master is close to this average.

Price to Book (P/B): 8.7

This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be leftover if the company went bankrupt for example. The industry average is 4.5 so Spin Master is higher than average.

Price to Cash Flow (P/CF): 18.9

Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the industry average for this industry is 14.6. 

This completes a basic evaluation of Spin Master. As always, there are tons of articles and discussions online about this stock and all stocks so they are also a good place to look at for further consideration. Spin Master is proving itself to have a winning formula in the toy and entertainment sector. No question they have had a string of hits. Whether they can keep this momentum remains to be seen but they do appear to have a strong growth strategy in place to keep on the cutting edge of this industry. I will be interested to see what their next big hit is in the near future. 

**Top photo courtesy of Anthony on Pexels