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Spin Master Corp. Has Dropped Over 10% the Past Month: Should You Buy?

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Spin Master Corp. (TSX:TOY) has seen its share price go on a bit of a rough ride the past month, losing over 10% of its value, but year to date, the stock has actually increased over 31%. I’ll have a closer look at the company and its share price to see if the stock is a good buy at its current valuation.

Financial performance

In the company’s most recent quarter, its sales rose by over 54% and profits of $22 million were up from just $3 million a year ago. Spin Master’s last fiscal year saw over $1.1 billion in sales, which increased over 31% from the prior year, and profits more than doubled.

Spin Master has also seen growth in its free cash flow, and with $80 million generated the past 12 months, that is more than the past two fiscal years combined. The company also has a strong balance sheet with minimal debt on its books.

The company, known for Hatchimals and PAW Patrol, has seen exceptional growth and is in a good financial position should it take on new ventures and acquisitions.

Acquisitions and future growth

The company’s improved financials were helped by Spin Master’s acquisition of Swimways, a manufacturer of outdoor recreational products, which took place last year. Spin Master also recently acquired assets from Aerobie Inc., a company that manufactures sports toys as well as outdoor flying disks.

Spin Master certainly looks poised to focus on outdoor activities, which could show strong growth as consumers become more health-focused and as parents try to encourage kids to spend more time outdoors being more physically active. The downside is that in a country like Canada with cold winters, sales are likely to become more seasonal.

Spin Master also recently announced that it would be expanding its key brands of Hatchimals and PAW Patrol into China, and the company would strengthen its partnership with online retailer Alibaba Group Holding Ltd. China is a significant market, and this could present terrific growth opportunities for Spin Master as its products become available to the world’s largest economy.

Stock valuation

Spin Master’s earnings per share of $1.17 mean the stock is trading at over 35 times its earnings. However, investors generally pay a premium for a company that has shown strong growth, which Spin Master has. One way to determine if this premium is excessive is to look at the company’s PEG ratio, which considers price earnings in relation to growth. With an average growth rate of 27% in its earnings per share for the past two years, Spin Master’s PEG ratio would come in at 1.30, indicating that the share price is a bit expensive.

Should you buy Spin Master?

From a valuation standpoint, the stock is trading at a high price, and it may not be a good choice for value investors. However, given the company’s acquisitions and growth into China, there are certainly many opportunities for growth that could drive sales and profitability, which would inevitably drive the share price as well. Given that the stock is still dropping in price, I would wait to see it at least stabilize first or show some sort of recovery before investing.

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Fool contributor David Jagielski has no position in any stocks mentioned.

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