Spin Master Corp. (TSX: TOY) is one of those wonderful Canadian gems that has really begun to make a name for itself over the last few years. During this time, the company has created some of the hottest toys on the planet, outperforming many of its bigger brothers that have dominated the toy industry for decades.
There’s no question that the toy industry is incredibly cyclical and is susceptible to the effects of seasonality. As a result, the quarter that includes the holiday season usually sets the tone for the new year.
When having a glance at Spin Master’s chart, you’ll see that the stock is on a steady upward trajectory with the largest of declines being from late November to mid-February, selling off at ~20% during this time span. Buying on such dips has been a very profitable endeavour in the past, but given that Spin Master hasn’t suffered such major losses this time around, does it still make sense to buy it as we head out of the period of seasonal weakness?
I think Spin Master is a strong buy today and on any dips that may happen in the near future. Versus its bigger brothers in the toy industry, Spin Master’s stock is remarkably steady, which is strange since it’s a much smaller company. Technically, it’s still considered a small cap with its $1.45 billion market cap.
Small-cap stocks are normally substantially more volatile than their large-cap counterparts, and in the cyclical toy industry, one would expect Spin Master shares to be a stomach-churning roller-coaster ride of ups and downs, but that simply hasn’t really been the case.
Why?
The company has a durable competitive advantage in its strong management team which prioritizes innovation and the development or acquisition of new intellectual property (IP). What makes the company really stand out from the crowd is its ability to create exclusive new brands without becoming overly dependent on firms like Walt Disney Co. for licensing to use exclusive brands, including Star Wars, Disney Princesses, and the like.
Consider Mattel, Inc. (NASDAQ: MAT), a firm whose stock plummeted ~72% peak to trough over the last few years. That’s a disgusting drop! The company suspended its dividend last year and has struggled to thrive in the rapidly changing toy market following its loss of Disney’s popular Frozen and Princess brands. Mattel is behind the iconic Barbie dolls, but over the decades, the doll hasn’t really changed. It’s a legacy product that continues to see weakness as kids opt for something new and innovative — technologically advanced physical-digital toys.
Spin Master is a technological innovator that’s changing the toy industry, which was once thought of as low tech and immune from such advancements in technology. Through organic R&D efforts or intriguing M&A activity, Spin Master is at the forefront of innovation in the children’s entertainment space. And it’s companies like these that are slowly and gradually eroding the moats of firms like Mattel, which have become overly reliant on legacy products and third-party brand licensing.
Spin Master still possesses licences to create Star Wars-themed toys; however, the company isn’t overly reliant on such licences. A huge chunk of Spin Master’s bottom line comes from its own line of toys under its exclusive award-winning brands. Think Hatchimals, PAW Patrol, and Luvabella. Spin Master is leveraging existing exclusive brands with new product lines, all while thinking up the “next big brand.” Even if Spin Master lost all of its third-party licences, the company would still find a way to come out on top, because of its strong portfolio of unique and exclusive brands.
Bottom line
Spin Master is my favourite small-cap holding, and I welcome any dips in the share price, as they’re nothing more than an opportunity to pick up shares of a business that has a gigantic durable competitive advantage.
The company knows how to innovate, and it’s taking a tech-inspired strategy to reinvent the children’s entertainment industry. I believe this will ultimately change the way kids and parents think about toys and games. At 21.9 times forward earnings, shares are an absolute steal when you consider the company’s explosive growth profile and the company’s ability to innovate and win prestigious awards on a consistent basis.
Stay hungry. Stay Foolish.
