Since Feb. 20, the day the stock market really started to fall apart in response to the increasingly clear threat posed by the novel coronavirus, shares of toy maker Mattel (NASDAQ:MAT) have shed 45% of their value. As of 2:50 pm. EDT, they're down another 14.1%.
And I blame SunTrust.
This morning, investment banker SunTrust announced it is cutting its price target on Mattel from $14 (about twice the stock's current price) to just $10.
Now, there are no further details available on SunTrust's move. StreetInsider.com reports that it happened, but nothing more than that. Given the uncertainty surrounding the analyst's reasoning for its move, therefore, investors' decision to subtract more than $400 million from Mattel's market capitalization today seems like a bit of an overreaction.
But is it, really? I mean, on the one hand, Mattel is still generating positive free cash flow (or at least it was until coronavirus hit) -- nearly $65 million in real cash profits over the past year. It's also worth noting that even SunTrust isn't telling folks to actually go out and sell Mattel. Despite cutting its target price, SunTrust still rates the stock a hold. What's more, its new price target of $10 is actually above where Mattel shares trade today.
On the other hand, though, Mattel is currently GAAP-unprofitable ($213 million in net losses last year) and lugging around a $3.2 billion debt load that needs to be serviced. If the company manages to keep the cash flowing through the coming recession -- all well and good. But what if it doesn't?
In that case, the debt load will become an increasingly difficult burden for Mattel to bear, and Mattel stock will become increasingly unattractive to own.