Spin Master Corp.: A Cautionary Tale of Why the Devil Is in the Details

Some people believe everything they read in the news, and that can be the kiss of death when it comes to investing because the devil is in the details, as you’ll see by taking a look under the hood at Spin Master Corp. (TSX:TOY).

The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Let’s play a little game of Jeopardy!. I’ll be Alex Trebek. The category is “Spin Master Corp. (TSX:TOY).”

If you’re unfamiliar with the popular trivia game show, contestants provide answers in the form of questions, winning varying amounts of cash based on the level of difficulty. For example, if the category was “Investing,” an appropriate answer might be “Warren Buffett” and the correct question, “Who is the world’s greatest investor?”

I hope that makes sense. Now, let’s get the show on the road.

Spin Master is a Toronto-based toy manufacturer whose 2015 revenue hit US$879 million, a 23% increase over its 2014 results. It’s the fourth-largest toy company behind just Mattel, Hasbro, and Lego. Earlier this year it made the news for its acquisition of Etch A Sketch from the Ohio Art Company. Like Jeopardy!, Etch A Sketch evokes fond memories from my childhood. It plans to reinvigorate the product just as it did with Meccano a couple of years ago.

With toy sales up 8% in 2015, Spin Master has lots of opportunities ahead of it, and its first-quarter numbers—net income of US$9.9 million on revenue of US$162 million, both well above the same quarter in fiscal 2015—suggest it’s making hay while the sun shines.

But before you go ahead and buy Spin Master stock, it’s important that we figure out what someone might pay to buy the company, lock, stock, and barrel.

Usually, a prospective buyer would pay an appropriate multiple based on its enterprise value, which is simply its market cap plus debt less cash on hand. One scenario might have Company A with a market cap of $500 million, no debt and $100 million in cash. Another could have it with $400 million in market cap, $200 million in debt and $25 million in cash.

In the first version of its capital structure, Company A would have an enterprise value of $400 million. In the second it would be $575 million for the same exact revenue and income stream. Now, this is only a made-up example, but it demonstrates why investors need to look more closely at the financial situation of prospective company investments.

Capital structure is a big deal. Our game of Jeopardy! will demonstrate why.

The Final Jeopardy answer: Spin Master’s enterprise value.

The question: ?

Before you can fill in the question, you need the three financial numbers mentioned previously. The first is market cap, and here I get five different answers from five different websites: $559.31 million, $2.59 billion, $556.62 million, $2.60 billion, and $548.23 million from Spin Master’s own investor relations site.

The debt and cash parts of the equation aren’t going to vary, and those can be found in its Q1 2016 report. To save you time, the debt is $76.79 million and cash $54.94 million.

Ready to provide the question? Well, we’re getting closer. But first, we have to decide which market cap is the right one. If one assumes that Spin Master’s investor relations number would most likely be the right one because it’s their stock, then the question becomes “What is $570.1 million?”

But, if you take the higher $2.60 billion market cap number, the question becomes “What is $2.62 billion?”

Huh! That’s a $2 billion difference. What gives?

The solution to this puzzle is all in how you calculate the market cap. Spin Master’s site uses 21.3 million shares outstanding as its multiplier with its stock price. Those are the subordinate voting shares which carry one vote per share. The much higher $2.6 billion figure includes almost 80 million multiple voting shares, which carry 10 votes each.

The mystery I’ll leave you with is this: Why does Spin Master use 21.3 million shares to calculate market cap, but closer to 100 million for earnings per share? If you can answer this riddle, you’re ready for the real Jeopardy!.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

Stocks for Beginners

Dip Buyers Could Win Big: The Best Canadian Stocks to Buy Now

These two growth stocks have taken hits recently, but their fundamentals remain strong, and their growth prospects are intact.

Read more »

A bull and bear face off.
Stock Market

Bear Market Bargains Emerge as Recession Stocks Return

If you want a deal, then go to the best stocks during a recession market dip.

Read more »

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

An investor uses a tablet
Stocks for Beginners

The Smartest Canadian Stock to Buy With $250 Right Now

Are you looking for the smartest Canadian stock to buy right now? Consider this gem and avoid market volatility.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

Electricity transmission towers with orange glowing wires against night sky
Investing

Fortis Just Might Be the Best Canadian Dividend Stock to Buy in April

Let's dive into a few reasons why Canadian utility giant Fortis (TSX:FTS) still looks like a screaming buy heading into…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »