Why I’d Avoid Spin Master Corp. Despite its Strong Q4

Spin Master Corp. (TSX:TOY) has achieved strong growth over the years, but it’s not likely to continue.

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Spin Master Corp. (TSX:TOY) recently released its fourth-quarter earnings results, which continued to show strong growth as sales increased more than 30% year-over-year and net income was up over 600%. In just three years, Spin Master has more than doubled its top line, while profits have more than tripled.

The company had another strong year, and investors initially responded strongly to the results with the stock hitting a new 52-week high on Thursday before declining to finish flat from the previous day’s close.

While there’s no denying that the stock has performed well, and the company’s results have been strong, there are several reasons I wouldn’t buy Spin Master today.

The company has too many brands

I’ve seen businesses that have had too many products. It adds unnecessary cost to the financials, while also limiting a company’s long-term growth potential. Besides Hatchimals and the Paw Patrol brand, most of Spin Master’s portfolio is relatively unknown.

It also doesn’t help that the company recently made an acquisition which was rather unnecessary — the purchase of Gund, which manufacturers plush stuffed animals and is known for its teddy bears. This will add to Spin Master’s collection of inventory, which could add inefficiency and redundancy to the company’s financials.

Fewer products means fewer costs and a greater focus, and Spin Master is taking the opposite approach.

Competition is stronger than ever

With recent news that Toys R’ Us is closing many stores and is in danger of being the next big retailer to go out of business, it’s a reminder that companies that focus on toys and children’s entertainment just aren’t that solid of an investment anymore.

When you consider the wide array of toys that consumers can purchase online from Amazon.com, Inc. or from Wal-Mart Stores Inc., there are many alternatives available, making it all the more important for a company to carry strong and successful products that can make solid contributions to the bottom line.

Price plays a big factor when it comes to toys, and when you’ve got two big giants competing against Spin Master, it makes it hard to see how the company can achieve success in the long term. While Spin Master still has a lot of potential worldwide, the company doesn’t have the moat or competitive advantage necessary to stay ahead of its competitors.

The valuation is high

Spin Master’s share price trades at nearly 40 times its earnings and 12 times its book value, both of which would be high multiples even for high-growth stocks. When you add in the fact that Spin Master recently hit a new 52-week high, it only makes it less appealing to buy the stock at its current price.

Bottom line

Spin Master has some good brands that it can build around, and while it has achieved strong growth over the past few years, it’s unlikely that the company will be able to maintain that pace going forward.

Given the recent sell-offs that we’ve seen in the markets, there is a concern that the bears are not far away, and stocks like Spin Master might be good candidates for some significant corrections in the near future.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon. Spin Master is a recommendation of Stock Advisor Canada.

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