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Why MEGA Brands Shares Plunged

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What: Shares of toy company MEGA Brands (TSX: MB) were down by more than 10% earlier today after its quarterly results and outlook disappointed Bay Street.

So what: The stock has soared in 2013 on a string of better-than-expected quarters, but today’s Q3 results — EPS jumped 25% but sales of $140.9 million were flat over the year-ago period — are forcing Mr. Market to quickly sober up. In fact, year-over-year gross margins slipped about 150 basis points to 38.5%, raising a bit of uncertainty among investors over MEGA’s competitive position going forward.

Now what: Management remains positive over the long term. “With our solid Preschool & Girls offering and recent traction in Boys & Collectors construction toys, including the launch of Call of Duty Collector Construction Sets, we continue to focus on sustaining our positive sales momentum through the balance of 2013,” said CEO Marc Bertrand. ”In addition, we are continuing to move forward with initiatives to improve our balance sheet, global manufacturing position and brand portfolio.” With MEGA shares still up healthy 60% year-to-date, however, I’d wait for an even wider margin of safety before buying into that bullishness.

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Fool contributor Brian Pacampara does not own shares of any companies mentioned.  The Motley Fool has no positions in the stocks mentioned above at this time.

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