Winner of the Toy Wars

By Keith Speights - May 24, 2012 | Tickers: HAS, LF, MAT, DIS | 0 Comments

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The toy business is a real doll-eat-doll world.

Two major players battle each other daily to win the hearts of kids and the dollars of parents. Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT), with market caps of $4.46 billion and $10.51 billion, respectively, dominate the toy market. LeapFrog (NYSE: LF) is smaller, with a market cap of $670 million, but has been gaining ground with its educational toys. Who will ultimately be the winner of the toy wars? I think that the answer is “none of the above.”

I’m not saying that these companies won’t be successful. They probably will. There are three areas in particular that bode well for the toy companies:

• International markets
• Weak dollar
• Movie and television tie-ins

In my opinion, though, another company stands to reap more rewards. Let’s take a look at the prospects for these three toymakers and the company that I think will emerge as the ultimate victor.

International Markets

The good news for Mattel and Hasbro is that Barbie and G.I. Joe have learned some profitable new languages. LeapFrog has jumped across the big ponds successfully also.

Hasbro and LeapFrog are seeing international sales become much more significant factors. Mattel already had a bigger presence in international markets, but is still seeing growth in those areas. Expect increased international growth for all three companies, particularly in Latin America and Asia. These areas have growing middle classes with more disposable income to spend on non-essential items like toys.

Weak Dollar

Because of these international sales, all three companies are impacted by currency fluctuations. When foreign currencies are devalued versus the dollar, the toymakers’ profits suffer. Mattel has the highest international exposure and estimates that a 1% change in the dollar’s value would impact their net sales by around 0.5%.

The dollar has gone up during the month of May, but the longer term trend has been downward. Some have criticized President Obama’s lack of commitment to strengthening the dollar. However, even Mitt Romney has received his share of criticism on this front also. Forbes published an online editorial opinion earlier this year that cited Romney’s weak dollar policy as his “glaring economic Achilles’ heel.”

My suspicion is that whoever wins the White House will not matter much for currency valuation. If this is the case, the dollar will remain relatively weak. And our three toymakers will cheer.

Movie and Television Tie-ins

Popular movies help sell toys associated with the movies. All three companies benefit tremendously from their movie tie-ins. In some cases, the toys serve as the basis for the movies, as is the case with Battleship and the Transformers movie series based on the Hasbro toys. Mattel and LeapFrog have not been as successful in having movies launched from their toys, although some animated Barbie movies have been made. Also, new movies are slated based on Mattel’s Monster High line of toys.

In other situations, the movie comes first with the toys following. Hasbro makes toys based on the Star Wars and Avenger movie franchises. LeapFrog develops educational toys based on characters from the movies Penguins of Madagascar, Cars 2, and Tangled. Mattel markets toys based on the Disney Princess characters, Cars, Toy Story and the upcoming The Dark Knight Rises.

Children’s TV shows have always enjoyed a symbiotic relationship with toy makers. Hasbro creates toys based on Sesame Street characters. LeapFrog’s toys include ones featuring popular TV show characters Dora the Explorer, Scooby-Doo and SpongeBob. Mattel toys feature characters from Dora the Explorer and Go, Diego, Go.

These entertainment products present excellent growth opportunities. Mattel increased sales by 14% in 2011 for its products tied in with movies and television. Hasbro even established its own television studio to produce programming based primarily on its brands. I expect all three companies will accelerate their movie and TV linkages.

And The Winner Is…

All of this leads us to the company that I think is the real winner in the toy wars. This company wins when Hasbro, LeapFrog and Mattel succeed, and even if they don’t. The hands-down winner in my opinion is Disney (NYSE: DIS).

Let’s revisit some of the popular brands for the three toymakers. The list includes The Avengers, Cars, Disney Princess, Tangled, and Toy Story. What do they all have in common? Disney. The Walt Disney Company profits from the toy sales through licensing agreements. Popularity of the toys generates more movie and DVD sales. Theme park attendance benefits from the toys tie-ins.

Disney also stands to gain from international growth and weak dollar opportunities in a similar way as the toymakers. The company receives over 21% of revenues from international markets.

The beauty of the situation for Disney is that it wins regardless of which toymaker comes out on top. They all are interconnected with Disney. If they all do well, that’s even better for Mickey and friends.

No Island of Misfit Toys

All of the companies have reasons to interest investors. Below are some key metrics:

Of the three toymakers, LeapFrog is especially intriguing with its low PEG based on strong growth projections. With a smaller market cap, the company could also be a candidate for acquisition by a bigger player at some point.

Overall, though, my pick is Disney. The company is solid. Growth potential abounds. The stock is attractively priced. Barbie is beautiful. G.I. Joe is strong. LeapFrog is hopping. But Mickey Mouse is a real winner.

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