Pat McKeough recently replied to an Inner Circlemember looking for an opinion on Spin Master. The Canadian toy maker saw its sales and earnings soar in the latest quarter, says Pat. But the fickle nature of consumers may challenge growth in the future.
Q: Dear Pat: Please give me your thoughts on Spin Master Corp. Thank you.
A:SPIN MASTER CORP. (symbol TOY on Toronto; www.spinmaster.com) designs and markets children’s toys, games and puzzles. It outsources the manufacturing to third parties.
The company’s most popular products include: toys based on its Paw Patrol animated TV series; Air Hogs remote control cars and planes, Meccano building kits and Spy Gear walkie-talkies. In addition, the company sells toys and games featuring content it licenses from major entertainment studios such as Disney, Warner Bros. and DreamWorks. These include toys based on Star Wars, Batman v Superman, Angry Birds and How to Train Your Dragon.
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The company sells its products through retailers in over 60 countries. However, sales outside of North America account for just 30% of its overall revenue.
Spin Master originally began operating in 1994. It first sold subordinate voting shares (one vote per share) to the public and began trading on the Toronto exchange on June 30, 2015, at $18.00 a share. Insiders control 97.7% of the voting power through multiple voting shares (10 votes per share).
The company’s revenue jumped 73.3%, from $507.5 million in 2013 to $879.4 million in 2015 (all amounts except share price and market cap in U.S. dollars). That growth is largely due to acquisitions. For example, in October 2015, the company paid $50 million for Cardinal Industries. Thanks to the purchase, Spin Master is now North America’s second-largest maker of puzzles and games.
Excluding unusual items, earnings soared from $0.23 a share (or a total of $22.8 million) in 2013 to $1.04 a share (or $98.6 million) in 2015.
In February 2016, Spin Master paid $11.1 million for the famous Etch A Sketch and Doodle Sketch toy brands. It later purchased Toca Boca, a Swedish toymaker, for $30.8 million.
Growth Stocks: Raised $101.4 million with share offering
To help pay for these businesses, the company raised $101.4 million by selling 4.9 million subordinate voting shares at $20.69 each.
Thanks to those new operations, Spin Master’s revenue in the three months ended June 30, 2016, rose 40.5%, to $179.4 million from $127.7 million a year earlier. Earnings jumped 70.3%, to $11.7 million from $6.9 million. Due to the extra number of shares outstanding, per-share earnings rose 50.0%, to $0.12 from $0.08.
The company ended the quarter with cash of $53.7 million, or $0.53 a share. Its long-term debt of $70.4 million is a low 3% of its market cap. Goodwill and intangible assets now total $156.0 million.
In August 2016, Spin Master announced its fifth acquisition since it became a public company: Swimways Corp., purchased for $85 million. That firm makes a wide variety of swimming pool-related toys and equipment such as floats, beach balls and goggles. The purchase should add $90 million to Spin Master’s annual revenue.
Thanks to its surging sales, Spin Master “has been on a roll” this year, as traders say. The stock has risen from $18 in February to $32 currently. It now trades at 20.5 times the $1.18 U.S. a share it will likely earn for 2016, which is somewhat above average. However, we are more concerned about the number and variety of its more essential drawbacks.
To begin, we are generally wary of investing in new issues, since they usually come to market when it’s a good time for insiders or the company to sell, and that may be a bad time for you to buy. We also are wary of investing in subordinate voting shares that are controlled by investors holding full-voting shares, as is the case here. We also see inherent risk in growth by acquisition.
The company has a good product line now, but toy fashions change quickly and buyers are notoriously fickle. To top it off, three major retailers—Wal-Mart, Target and Toys “R” Us—together account for nearly 60% of its revenue. As the appeal of Spin Master’s products wanes, all three are likely to demand deep price discounts.
Inner Circle recommendation: Okay to hold, but for highly aggressive investors only.
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