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Marc Bertrand, CEO of Mega Brands speaks with reporters at the company's headquarters in Montreal. June 7, 2007.John Morstad/The Globe and Mail

You can add Mega Brands Inc. to the list of troubled Canadian companies who have miraculously turned themselves around.

Much like The Brick Ltd. and Superior Plus Corp., both of whom were in the investor doghouse, Mega Brands was trapped in a downward spiral. Exactly one year ago, the stock hit a 52-week low at $5.62.

Early Friday morning the shares were worth $15.58 each. That's a 177 per cent rebound in just one year.

The company's still got a long way to go to get back to its former glory -- the shares are still worth only about half of their post-crisis peak value - But this is a success story to be proud of, considering the stock hasn't seen these prices in over three years.

Hampered by a class action lawsuit related to one of its magnetic toys and burdened by way too much debt, Mega Brands shares sunk incredibly fast in early 2010 and continued to dwindle for more than two years.

To turn things around, the company took a number of successive steps. Last March the big news came that Mega Brands signed a Major licensing deal with toy giant Mattel to create Mega Bloks building sets based on the Barbie on Hot Wheels brands.

Meanwhile, the U.S. economy started to gather steam. When the company reported first-quarter earnings last week, its North American sales were up 14 per cent over the same period in 2012.

Then the big news came this past March when Mega Brands announced a special deal with its warrant holders, whereby its warrants would be exercised early, giving the company $55-million in cash to put toward halving its debt load. At the time of the deal, the stock was trading around $13.80 but the warrants could be exercised at $9.94, so they were already deep in the money and the holders were happy to get stock of a hot company.

The deal reduced Mega Brands' interest expense by $6-million a year and brought its debt down to 1.1 times its earnings before interest, taxes, depreciation and amortization from 2.3 times just four months earlier.

The sad part of this story: BMO Nesbitt Burns analyst Gerrick Johnson believes the best part of the rebound is tailing off. "At this point, we believe the 'easy money' has been made and further near-term price appreciation will likely prove more difficult for investors to achieve."

That doesn't mean he's turning against the story. Quite the opposite. He still believes in the growth potential.

"Gross margin performance has been inconsistent in recent quarters, but we believe expansion can continue through the rest of the year and into 2014 as commodity costs appear to be stable, and the company benefits from improvements in its Montreal manufacturing facility, leverage of fixed costs from higher sales, and mix with higher margin construction toy sales growing faster than lower margin stationery products," he wrote.

Falling inventory levels are a particular bright spot. In the fourth quarter Mega Brands saw its inventory drop by about $30-million. Construction toy sales have also grown in 13 of the past 14 quarters for the company.

But any gains from here won't come as quickly as they have in the past year, so Mr. Johnson wants investors to express some caution. If investors listen, don't be surprised to see some profit taking. Those who stuck with the stock have earned the right to take some cash off the table.

(Tim Kiladze is a Globe and Mail Reporter.)

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
MAT-Q
Mattel Inc
+0.25%19.81
SPB-T
Superior Plus Corp
-0.1%10.09

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