While the equity indices are trading near all-time highs, several stocks are trailing the broader markets. For instance, tech stocks have rallied in the last 15 months while debt-heavy companies, part of sectors such as real estate, energy, and industrials, are feeling the heat.
Another TSX stock that has underperformed in recent years is Spin Master (TSX:TOY). Valued at $3.1 billion by market cap, Spin Master stock is down almost 50% from all-time highs, allowing you to buy the dip and benefit from outsized gains going forward. Let’s see why it makes sense to own this magnificent Canadian stock in your equity portfolio right now.
An overview of Spin Master
Spin Master is among the largest children’s entertainment companies globally. With distribution in more than 100 countries, Spin Master’s brand portfolio includes PAW Patrol. Rubik’s Cube, Air Hogs, and GUND. It is also a global toy licensee for other popular properties.
Moreover, Spin Master has an entertainment division that creates and produces multiplatform content through its in-house studio and partnerships with other creators. In recent years, Spin Master has established a presence in digital games, unlocking another high-margin revenue stream for the company.
How did Spin Master perform in Q1 of 2024?
In the first quarter (Q1) of 2024, Spin Master reported revenue of US$316.2 million, an increase of 16.5% year over year. In the March quarter, Spin Master completed the acquisition of MND Holdings, a leading brand in early childhood play that offers a portfolio of creative and development toys. This segment added US$40.4 million in sales in Q1 and was a key driver of top-line growth.
However, the acquisition weighed heavily on profit margins, resulting in an operating loss of US$14.5 million, compared to an operating income of US$12.7 million.
The drawdown in Spin Master stock has also raised its dividend yield to more than 1.6%, as it pays shareholders an annual dividend of $0.48 per share. Given a payout ratio of less than 30%, Spin Master has enough room to raise dividends further. In fact, the company just doubled its dividends from $0.06 per share to $0.12 per share in Q1 of 2024.
What’s next for Spin Master stock?
Spin Master emphasized that its capital allocation strategy for 2024 is focused on innovative IP-driven revenue and profitability growth while continuing to invest in entertainment content and digital games.
During the earnings call, company chief financial officer Mark Segal stated, “We will continue to focus on strategic M&A and venture investments, particularly in the Digital Games and Entertainment segments, as we integrate Melissa & Doug into the Toys segment.”
Analysts tracking Spin Master expect sales in 2024 to rise by 47.6% to $3.11 billion and by 4.2% to $3.25 billion in 2025. Bay Street also forecasts adjusted earnings to improve from $2.92 per share in 2023 to $3.12 per share in 2024 and $3.45 per share in 2025.
So, priced at less than 10 times forward earnings, Spin Master stock is quite cheap, given that adjusted earnings are forecast to expand at a steady pace going forward. Analysts are also bullish on the TSX stock and expect shares to surge by 50% in the next 12 months.
