‘Tis the Season for Toy Stocks

The almost 3% drop in Black Friday sales this year has dented hopes for a strong holiday shopping season but not the expectations of billions of children worldwide. They are still expecting stockings to be filled and gifts to be wrapped. As mom and dad cut back on their own jolly spending to afford the hot new toys this season, investors may want to look to stocks of companies that make the must-haves of every girl and boy.

Holiday spending may not be so jolly this year

The National Retail Foundation reports that shoppers spent about $57.4 billion in the four days to December 1st, down 2.9% from the previous year. Besides the dismal overall number, shoppers also spent nearly 4% less on average. The weakness in spending could last through the shopping season as disposable incomes have barely budged over the last four years and consumer confidence reported last month fell to its lowest level in seven months.

Anyone with young kids knows that you do not want to wake up Christmas morning and not have a few ‘wow’ items under the tree. The sacrifice moms and dads will make by not getting all they want will pale in comparison to seeing a disappointed young one.

While more weakness in sales will probably hurt all retailers, the toy makers could come out relatively better. Two companies rule the space, Mattel (MAT) with its long-running Barbie and Hot Wheels brands, and Hasbro (HAS) with its strong position in movie-related toys.

Mattel has a market capitalization of $15.5 billion and is more than twice as large as its rival. The shares plummeted more than 10% in July when the company missed earnings on slower growth in the Fisher-Price line and a change to the Barbie promotional strategy. The company is seeing some success with new brands like Monster High and beat earnings expectations by 8% in the most recent quarter.

The company books 44% of revenue from international sources, with Europe accounting for roughly half of foreign sales. Total sales grew by an annual rate of 1.5% over the last five years to $6.4 billion last year. With the big drop in July, the stock is relatively cheap at 19 times trailing earnings. The shares pay a 3.2% dividend yield.

Hasbro is the smaller of the two toy companies with a market cap of $6.8 billion. Shares are up more than 40% over the last year as the company’s licensed movie toys, specifically the Marvel line-up, looks to boost sales. Beyond the movie-related action toys, the company also sells traditional board games through its Milton Bradley and Parker Brothers lines.

Hasbro also books about 44% of sales internationally though exposure to emerging markets is slightly higher than Mattel. Total sales grew by an annual rate of 1.3% over the last five years to $4.1 billion last year. The shares pay a 3.0% dividend yield and look relatively expensive at 24.6 times trailing earnings.

toy maker dividend chart

Choosing between the two names is difficult. Mattel is much less expensive and has grown revenue at a faster rate, along with marginally higher dividend. Hasbro has the all important diversifier in movie-related toys and the Marvel collaboration could pay off big time in the next few years. Both companies are diversifying internationally, especially into emerging markets where consumer spending is increasing at a much faster rate than in the United States.

I like Hasbro, mostly on the diversification into toys licensed from the Marvel superhero movies. Four movies are in post-production (sequels for Captain America, The Amazing Spider-Man and X-Men and a new franchise with Guardians of the Galaxy) and are set to release in 2014.

One disadvantage for Hasbro is its exposure to traditional board games which may see lower sales against online competition. While the company has been transitioning its games to the online space, the jury is still out on how well the company can drive sales to old favorites like Monopoly and Clue.

If holiday retail sales continue to come out under estimates, you might not want to choose between the two companies. Shares of both companies pay a higher dividend yield than either the S&P500 or the Market Vectors Retail ETF (RTH). While I prefer Hasbro on its movie-related toys, Mattel is relatively cheaper and is seeing strong growth in some new brands. Maybe ‘tis the season to buy both.


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