Risk Only Play Money on Mattel; And Get Out of AutoNation’s Way
Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Mattel (MAT)
Jim: Up first is the world’s biggest toy company and, of course, the maker of the Barbie doll.
Mike: I grew up with two brothers and I have two sons, Jim, so Barbie is pretty much a closed book to me. However, I keep hearing that she’s been pretty successful over the years.
Jim: To say the least. El Segundo-based Mattel also makes toys under the Fisher-Price, Hot Wheels, Sesame Street and Matchbox names, just to name a few.
Mike: It’s also been getting into computer software, and it just bought Learning Co., whose titles include Reader Rabbit, Carmen Sandiego and other youth favorites.
Jim: Now, for much of the 1990s, Mattel--thanks in good part to Barbie’s seemingly ageless appeal--was a standout performer. Its stock went virtually straight up and split several times. Then came last year, and everything fell apart faster than a new toy on Christmas Day. In fact, it was just before Thanksgiving and Christmas last year when Mattel’s woes really came to light.
Mike: That holiday period, of course, being the whole ballgame for toy makers.
Jim: Right. A couple of things happened. First, there’s supposedly been a shift in how our society buys toys, namely that kids are growing out of toys at earlier ages, and their parents aren’t buying as many toys from traditional retailers like industry giant Toys R Us. So last year Toys R Us and its peers slashed the amount of toys they bought from Mattel, Hasbro and others.
Mike: And this was a very big deal, because overstuffing retailer inventories was a way of life for the toy companies. They were able to basically shove their goods down retailers’ throats when they wanted and thus cover their bottom lines. That’s not going to happen any more.
Jim: It didn’t help that Mattel and its chief executive, Jill Barad, were touting the company’s prospects right before the roof caved in.
Mike: So now we have a stock trading around $25.
Jim: . . . which is off a whopping 42% over the last 12 months. Another problem: Mattel’s No. 2 executive, Bruce Stein, left in March, and other managers also have left. In a massive restructuring announced in April, Mattel slashed 3,000 jobs, or about 10% of its work force, which can’t be helping morale in El Segundo.
Mike: The question now is whether Mattel’s stock is a bargain.
Jim: Not to me. I’d pass for now, mainly because I think Mattel is one very mismanaged company.
Mike: The questions about Barad’s ability to manage this operation are legitimate, and the clock is ticking on this CEO.
Jim: Let me put it this way: Here we have the world’s greatest toy company, with $5 billion in annual sales and, presumably, people who constantly track the pulse of toy buyers and their habits. Yet Mattel makes it sound as though it was just minding its own business when, out of nowhere, Toys R Us dialed up and ruined everything.
Mike: You’re asking why should this have been a surprise.
Jim: That’s exactly what I’m asking. Mattel more than any firm should know when its sales aren’t going as planned and should have made that clear to the public. If I’m a Mattel stockholder, should I be getting my guidance from Toys R Us?
Mike: Well, in fact, there have been stories suggesting that plenty of people at Mattel saw this coming, but they could not get Barad’s ear.
Jim: Barad, of course, got the top job after doing a fabulous job of merchandising Barbie and elevating the doll into one of the world’s great trademarks and a heckuva franchise. But even Barbie’s sales have gone stale lately.
Mike: Mattel’s problems make you wonder whether Barad’s faith in the strength of that brand was too strong, while her ability to internalize what was happening to her company--in terms of changes in the industry--was not strong enough.
Jim: Let me put it more bluntly: Is Mattel leading the toy industry or just reacting to it? There’s a big difference.
Mike: I see your point. The jury is out, perhaps for the next six months to a year, on whether Barad can handle all these changes or if she has to go. Mattel did name a new president last week, but still I don’t think it’s time to buy the stock.
Jim: Now, in Barad’s defense, she’s said Mattel will try to tailor its production more to consumer demand. She’s also trying to diversify Mattel’s product lines and is preparing to sell Mattel toys directly via the Internet.
Mike: I’m sorry, the Internet is not going to be the answer to their problems. E-commerce opens up another retailing stream, but it’s not going to be the end-all.
AutoNation (AN)
Jim: A reader asked us to look at this stock, Mike, because it’s been on a long, agonizing slide even though it’s now the biggest U.S. owner of car dealerships.
Mike: And run by billionaire Wayne Huizenga.
Jim: Wayne, of course, made his fortune first with garbage hauling via Waste Management, then with video stores via Blockbuster Video. In both cases he aggressively bought small operators to give his chains massive scale.
Mike: He’s a fickle sort of chap, isn’t he? What is the attention span of Wayne Huizenga, really?
Jim: Today he’s selling cars, which is why AutoNation recently changed its name from Republic Industries, and this outfit is on its way toward $20 billion in annual sales.
Mike: Let’s detour here into the phenomenon of CEOs who suddenly decide they want to be in a new business, so that investors who thought they owned stock in a supermarket company suddenly discover it’s making jet fuel or something.
Jim: Does Cendant’s Henry Silverman come to mind?
Mike: How about John Teets, the former Dial CEO? He started as chief executive of Greyhound, the bus company. One day his stockholders woke up and realized he was now selling soap, and Greyhound took the Dial name. Huizenga is a past master at this practice.
Jim: Past is right.
Mike: Let’s not forget that at one point, Huizenga owned a baseball team and later ended up owning a shell of a baseball team. The team was the Florida Marlins, which won the World Series and then was dismembered by its owner.
Jim: Huizenga is perhaps most famous for Blockbuster. He started with something like 19 outlets, turned it into a chain with thousands of stores and ultimately sold it to Viacom for about $8 billion.
Mike: That’s right, and Viacom is still laboring over how to turn a consistent profit with Blockbuster. That may have been a classic case of Wayne Huizenga selling them a dead horse before it hit the ground.
Jim: As for AutoNation, Huizenga is certainly up to his old tricks. He’s been buying up car dealerships like crazy, including many in Southern California. But in terms of the company’s performance, I see little going for the company other than Mr. Huizenga’s reputation.
Mike: That’s a plus, you say?
Jim: AutoNation now has 380 franchise dealerships in 20 states and a chain of used-car lots. The company also owns three car-rental firms, including Alamo and National. Given that all the car-rental firms have been raising prices after years of waging bloody price wars, and car-rental profits are much healthier, who knows, car rentals might just be AutoNation’s best asset right now.
Mike: But the big issue with AutoNation is car sales.
Jim: Right, and this is an incredibly cutthroat business with razor-thin profit margins, no matter how many dealerships you own. This is a business where it’s not unusual for a dealer to sell a $15,000 or $20,000 car for $150 above cost, just to move it off the lot.
Mike: And I don’t believe you’ll find that AutoNation, in any market that it’s in, has a reputation for being the cheapest dealer.
Jim: More to the point, it’s evident that Wall Street doesn’t see the appeal, either. This stock has barely budged since last November and still trades around $17 a share.
Mike: Or about 15 times its expected ’99 earnings.
Jim: To give you an idea of Wall Street’s skepticism, AutoNation just announced that it, too, is going to start selling its products via the Internet.
Mike: They’re going to the Internet! Are they going to sell Barbies too?
Jim: Now, other companies have seen their stocks jump when they announced e-commerce sites, but not AutoNation. Even though it predicted its Internet car sales will reach $750 million by the end of next year--a figure I find very hard to believe, by the way--Wall Street yawned, and the stock barely budged.
Mike: Appropriately so.
Jim: Still, AutoNation’s size is nothing to laugh at. The company, and others of its ilk, are getting so large that the Big 3 auto makers are starting to fret that these mega-dealers could start dictating terms to them. But for now, I don’t see anything that would give this company’s performance, or its stock, a sizable lift--which won’t comfort our reader, who bought it at $40.
Mike: Me neither. Although I certainly wish Huizenga great success in his next venture, whatever it might be. Making jet fuel, maybe.
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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.
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You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
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Mattel
Monday: $25.13
AutoNation
Monday: $17.50
