Spin Master and portfolio updates

It has been a while since I penned a Stock Talking update and I’m glad to say my portfolio remains the exact same as from my last update with some small additions, including Canadian toy company and Paw Patrol IP owner Spin Master (TOY on TSE but you can buy as SNMSF as a US OTC stock – beware bid-ask isn’t great). This note will be a quick overview write-up on them and some other portfolio updates.

Spin Master – Fairly Valued with Upside From Paw Patrol and Toca Franchises

I’ve been enjoying Unknown Market Wizards and my favorite chapter was on social listening and fundamentals guru Chris Camilo. Chris runs the interestingly-named Dumb Money podcast / YouTube channel, and the show recently did an episode on Spin Master after one of their subscribers Phil Baum did a write-up on it.  

I recommend checking out both. Chris is a strong proponent of what he calls social arbitrage, which means recognizing a trend through good old fashioned scuttlebutt or social media channels before results start to show up in credit card data and then quarterly earnings. 

The thesis on Spin Master is that free cash flow from the catalyst of the upcoming Paw Patrol movie and the Toca mobile games is not being recognized by the market. Each FCF stream represents higher margin business than just making and selling toys, as Spin has a claim on Paw Patrol box office receipts and royalties from other toymakers and Toca sells digital goods.

Before we get to the main thesis, let’s do a quick overview of the company. Spin Master has been around since 1994 (there is a nice history of the company here) and its three founders are still involved. Ronnen Harary is on the board and leads off earnings calls (he delivered opening remarks last quarter). Ben Varadi is the Chief Creative Office and an executive VP. Anton Rabie is also on the board. Note that the company went public in 2015.

You can think of the company as having three divisions – toys, entertainment and digital games.

– Toys – Spin makes toys you can find at any Target, Barnes & Noble or retailer of your choice (trust me, I now look every time because I own the stock). Most existing readers will be familiar with Paw Patrol – for those who aren’t, it’s a pre-school age TV show on Nickelodeon that has been running for six seasons and details the adventures of puppies with all types of advanced gizmos and gadgets who save human beings. The puppies are the basis for a ton of 100+ Spin SKUs (you can think of each SKU (stock keeping unit) as a unique toy). They also have a ton of other toy lines readers will recognize – Tech Deck (which they acquired in 2007 – I used to play with those miniature skateboards all the time in middle school), Etch a Sketch (acquired in 2016), Hatchimals, Rubik’s Cube, Batman and more. They have won all types of toy of the year awards and from my research look like leaders in quality.
– Entertainment – It’s all about Paw Patrol. This is most-watched pre-schooler television show in the world and the company’s most recognizable asset. The Paw Patrol movie drops on August 20th and includes Adam Levin of Maroon 5 doing the title song and a number of celebrities including Kim Kardashian and Jimmy Kimmel doing voice acting. Paramount is the studio behind the movie but pays Spin a share of box office receipts, which they expect to receive in late 2021 and 2022. Spin also advertises its toys when Paw Patrol and other kids shows run – for example, you can see ads for Kinetic Sand if you’re tuned into Cartoon Network.
– Digital – Division I’m most excited about and is growing fastest. Toca Boca is the company’s prized digital asset, which is basically a series of games where you create your own character and do human things like make a house or get your hair styled. Toca has 40mm active users and digital revenues grew like crazy during C19. If you check out top games for kids on your iPhone, you’ll see nearly all of them are Toca. They also own Sago Mini, which is a series of learning applications for pre-schoolers with talking animal characters.

One more thing on Digital – the company itself sees Boca as having the potential to be like Roblox in a decade. Here’s Ronnen Harary on their last earnings call and describing the game’s flywheel:

Is This Priced In?

I want to save a post on valuation for the future but the quick thought there is management hasn’t given analysts any reasons to massively raise expectations for 2021:

I expect this year that Paw Patrol toys could surprise to the upside and like the long term future because Boca can continue to expand users and ARPU (and it’s possible people might be surprised when they start getting box office share from Paramount in Q421 and 22).

The company based on its presentations did $232mm of FCF last year and has $262mm of cash on the balance sheet as of 3/31 and no debt. The 2020 FCF number you can back into via $311mm of cash from operating activities and $79mm of capex – 311 – 79 = $232:

The net working capital change actually accounts for a lot of the 2019 difference, which is most due to a difference in trade receivables:

FCF has been fairly volatile for Spin, as have some other key metrics which likely account for the sideways performance of the stock over the last five years:

That said, I do think now that Paw Patrol and Boca are maturing franchises, we should see some operating leverage (recall they collect royalties from other toymakers who sell Paw toys) and more stable FCF ahead. At $232mm of FCF, the company has a 5% FCF yield when you take out the $262mm of cash from the $4.85bn market cap (note these are Canadian dollars). So on a trailing basis, the company has roughly the same yield as the S&P 500.

I like Spin Master more than the market to grow free cash flow into the future. I think there is an outside shot Boca gets $1bn in revenue over the next decade at 30% FCF margins and is then doing more FCF than the entire company right now. If this happened, I also don’t doubt someone would try to acquire Spin for Boca. On the Paw Patrol side, I also think you can never underestimate the value of an amazing franchise – they could do a ton of movies in the future, and as we’ve seen with CROX, it never hurts to have a Kardashian promoting your brand.

I’m long the stock and intend to add more if Boca and Paw Patrol continue to trend up.

Portfolio Updates

– NCMI – I’ve kept adding to my National CineMedia position and am confident it will produce cash this year and get at least half way or more to 2019 FCF levels in 2022. Pre-ticket sales for Fast and the Furious 9 are extremely strong and New York and LA are now 100% open. Quiet Place 2 marked the box office’s first “back to 2019” film, and F9 will likely best it for $60-70mm+. Importantly, I got these numbers from analyst estimates. The industry is now expecting new movies to do well, which means advertisers can expect the same – this clarity is going to help NCM get firm commitments going forward. Additionally, I think Black Widow could do $100mm in a single weekend, which in itself will generate a barrage of positive headlines for the industry. Advertisers should be able to use the NCM platform and be confident they’ll see the same ROI on ads – in fact, it may be better now that NCM’s platform extends to Coinstar kiosks, 7/11s, restaurant tablets and more (remember the Digital Out of Home division didn’t exist in 2019). I’ve also been following the company’s LinkedIn job postings, and they are hiring for 15 jobs right now.
– CROX – let your winners run. My last post on CROX was called “nothing to do” , and I think you just hold great companies when they smash earnings over and over again. Is CROX rich at these levels? Maybe, but it’s abundantly clear to me the company keeps generating buzz and people can’t get enough of it (watch this video on high-heeled Crocs). The collaborations CROX keeps doing are driving sales growth and media coverage (sometimes known as earned media). The brand is on fire and I’m not selling.
– TRTN – Triton is the world’s largest container lessor and owns ~30% of the market. Last time I wrote about them I talked about how they’re aggressively spending on capex because they believe it’s a better use of cash than returning to shareholders. Now they’re refinancing more expensive debt with senior secured bonds with 3% 10 year debt. This company is originating longer and more profitable leases and raising capital cheaper. It should re-rate in my opinion and I’m adding more shares on dips.

Happy trading,