Is it Time to Play this Toy Maker?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While kids, like their parents, are increasingly turning to new technologies to satisfy their entertainment needs, traditional toys and games still appear to have a place in many children’s hearts. This is especially true over the holiday period, which is when toy makers enjoy their greatest sales, sometimes up to 40% of their yearly revenue. Despite Mattel’s (NASDAQ: MAT) earnings miss over this all-important holiday quarter, the prospects for the company look pretty good.

Stock at a Glance

Mattel is the world’s largest toy maker, owner of world renowned toy brands such as Barbie, Hot Wheels, Matchbox and Fisher-Price, divided into Mattel Boys and Mattel Girls products. The company has a market cap of nearly $13 billion and around 28,000 employees. With a beta of 0.65, the stock offers reduced volatility, and it also yields around 3.3%. The stock has rallied over 21% in the last twelve months.

Earnings Miss

Mattel missed Q4 analyst estimates with net income down 17%, mainly due to a litigation charge. The miss is particularly unfortunate as 4th quarter earnings tend to be the most important for toy makers because they include holiday season sales. The company reported earnings of 87 cents per share, compared to $1.07 a year ago. Excluding the litigation charge, earnings would have been $1.12, compared to analyst expectations of $1.15. Revenue was up 5%, though still missing analyst expectations. Worldwide gross sales for their girls and boys brands were up 5%, but Barbie sales were down 4%.

Mattel’s smaller competitor Hasbro (NASDAQ: HAS) is facing similar headwinds, suffering from lower-than-expected holiday demand. Hasbro is the owner of brands such as Monopoly, GI Joe and Nerf. The company gave a revenue estimate of $1.28 billion, which was well below analyst expectations. The company’s earnings estimates were also well off the analyst consensus. The announcement sent the stock tumbling 5%. The full earnings release is due on Feb. 7.

Valuations and Metrics

Mattel currently trades at 15.6x earnings, which is slightly higher than the 14.23x industry average, but forward P/E is 13.5x. The price to sales is also a little higher than the industry average at 2.04. Yet the company has a great operating margin of 18.7% and an impressive return on equity of 31.5%. The company doesn’t have a huge amount of cash on hand, around 282 million dollars, and has a total debt to equity ratio of 57. Aside from the return on equity, these metrics aren’t stellar.

Hasbro looks a little cheaper with a P/E of 14.3, but the operating margin, as well as return on equity, are noticeably lower. Additionally, they have a lot more debt. JAKKS Pacific (NASDAQ: JAKK), a smaller competitor who produces dolls and figurines based on Cabbage Patch Kids and Hello Kitty, among others, has been doing very poorly with earnings over the last few years and is down about 20% in the last twelve months. With an operating margin barely above zero and a negative return on equity, JAKKS doesn't look like a particularly compelling alternative for either Hasbro or Mattel at the moment. 

Bottom Line

The toy industry, as a result of decreasing demand, is facing some headwinds at the moment, with crucial 4th quarter sales missing analyst expectations. Mattel does seem to offer some value at the moment, but investors should be warned to keep an eye on earnings reports, and perhaps even to wait for a pullback as the company is valued at a bit of a premium to the industry at the moment.

DUJames has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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