Dreaming of buying LEGO stock

Warren Buffett claimed that it is better to invest in shares of those companies whose services or products you use. And what’s more, you enjoy it. Peter Lynch, another great investor, was looking for new investment ideas for his fund while performing the duties of the daily shopping routine. And many times he found great companies to invest in by adding their products to his cart from the shelves of nearby stores. LEGO stock certainly belongs on this list. It’s not for nothing that the company’s name has become a household name for all children’s designers. LEGO is the absolute top of mind in surveys and the No. 3 company in the world in terms of reputation according to Global RepTrak 2022 ranking.

Unfortunately, there is one thing. LEGO is a private company, which means its shares cannot be found on stock exchanges. Founded in 1932 by Ole Kirk Christiansen in Denmark, the company is still owned by his family. The company name comes from the Danish “leg godt”, which means “play well”. Let’s play a game as if we had the opportunity to buy LEGO stocks. Would you do this?

We have found the company’s annual reports for the last 10 years and analyzed them. You can check them on the company`s website lego.com. The result is our traditional rating, which we regularly update for shares of public companies. Curious about LEGO rating?

LEGO revenue for 2022 (last year’s report has yet to be released) amounted to DKK 64.6 billion. Danish krone must be divided by 7 to get the value in US dollars. So annual revenue is approximately $9.7 billion! More than 40% of revenue comes from the Americas, and slightly less than 40% comes from European consumers. LEGO’s net profit for 2022 was 13.7 billion crowns, or approximately $2 billion.

If LEGO shares were to go public, we would look for them in Consumer Discretionary sector. And there we will find 2 public companies of the Danish giant’s competitors — Hasbro Inc and Mattel Inc, whose absolute indicators are much more modest! Mattel (MAT) reported earnings of $146 million for the quarter ended September 2023. At the same time, the annual profit for the last 12 months was only 83 million, that is, the quarter was exceptional. Hasbro (HAS) has been losing money for 2 years now. It turns out that LEGO is an extremely profitable company. Just look at its financials and our margin estimates!

As we found out, there is no point in comparing it with similar companies. To roughly estimate the scale of the business, let’s compare revenue and profit with other Danish companies. And then we find out that in terms of revenue, LEGO would be in the top 5 companies, right between the transport giant Maersk and the beer manufacturer Carlsberg! In terms of profit, it would even break into the top three, right after the world’s largest insulin manufacturer Novo Nordisk and Danske Bank!

Having understood profitability as a measure of competitive advantage and market position, we usually analyze how the company achieved such success. Is she borrowing too much to pay for the banquet? LEGO is in good shape with its debts and its burden is completely controlled. Moreover, most borrowings are leasing, not loans. But we still include them in debt according to our valuation method.

LEGO’s return on equity exceeds 40%. This is at the level of companies such as Microsoft, Tesla, Visa, and Adobe. For example, Mattel which we talked about earlier has an ROE of only 6%. As we know, ROE or return on equity is the product of return on assets and financial leverage. Let me remind you that financial leverage is calculated as the assets-to-capital ratio. If it is too high, then outstanding return on capital is achieved not due to high efficiency in the use of assets or, in other words, the business itself, but due to the aggressive use of borrowed funds. As for LEGO the financial leverage ratio, sometimes also called equity multiplier, is 1.64. This is quite conservative. By the way, for Microsoft this value is almost 2.

The main risk of such large, outstanding, and investor-friendly companies is the rate of growth. LEGO is not a growth story — it is a mature company. The average 5-year net profit growth rate is a solid 15%. Over 10 years, this value is slightly more modest — only 10.5%. Typically, when measuring sustainability, we look at 2 and 5-year periods, but since we are dealing with annual data here, we decided to look at a longer period. As a result, the rate of profit growth is comparable to its deviation for 5 years and slightly less over 10 years. This is to be expected for a mature company like LEGO.

The company’s final rating is outstanding. The business is doing great and that`s why the company does not require financing through an IPO. And there is no need to share profits with shareholders! Instead, the company is actively involved in social activities and charity through LEGO Foundations, which deserves special mention and respect. And what about LEGO stock price? A very interesting question, but since the company is not public, we do not have any history to analyze the company valuation. But, given all the data above, we can assume that the entire company could be valued at approximately $50-60 billion. How did this estimate come about? Let us recall that the company’s annual profit is $2 billion. The average P/E ratio in the leisure industry is around 18. However, companies with similar historical financial performance and growth rates are estimated at 25-30 annual profits. From here we get an approximate potential LEGO market cap in the range of $50-60 billion.