Is This Toy Company a Good Buy After Its Recent Drop?

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

Barbie’s owner, Mattel (NASDAQ: MAT), dropped nearly 6.6% in one day. Even after the drop, Mattel is now up around 18% since the beginning of the year. Famous investors, including Joel Greenblatt, Tom Gayner, and Jim Simons currently have Mattel in their portfolio. Should investors consider the recent drop in Mattel’s stock price a good investment opportunity? Let’s find out.

Sluggish second-quarter earnings results

The drop was due to Mattel's sluggish second-quarter earnings results. In the second quarter, Mattel generated nearly $1.17 billion in revenue, 1% higher than last year. In terms of its core brands, Barbie was down the most with a 12% decline, while global worldwide sales of the American Girl brand increased 14%.

Its operating income came in at only $94.8 million, a 28% decline from the operating income of $131.4 million in the second quarter of 2012. Its net income experienced a drop of 24%, from $96.2 million, or $0.28 per share, to $73.3 million, or $0.21 per share. The lower income was due to higher selling & administrative expenses.

During the second quarter, Mattel returned $119 million to its shareholders by repurchasing 2.7 million shares. Investors might be excited with the company’s plan. In the third quarter, the company would pay investors $0.36 in quarterly dividend per share. Moreover, the share repurchase program has been raised by $500 million, marking a share buyback yield of 3.3% on a total market cap of $15 billion.

Mattel is trading at around $43.30 per share with an EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 12. Investors also get a sweet dividend yield of 3.1%.

How about Hasbro and JAKKS?

Compared to its peers Hasbro (NASDAQ: HAS) and JAKKS Pacific (NASDAQ: JAKK), Mattel’s valuation is in between the two. Hasbro is the cheapest company among the three. At $46.40 per share, Hasbro is worth $6 billion on the market. The market values Hasbro the cheapest, at only 8.7 times its trailing EBITDA. Hasbro generated most of its revenue from two main product categories, Boys and Games.

In the first quarter of 2013, the Boy category generated most of its revenue, $243 million. Hasbro has been trying to simplify its product portfolio, planning to reduce 40% items by 2015 and 30% SKU reduction in the period of 2011-2015. It targets as much as $100 million in net savings by 2015, including $55 million in workforce reduction, $20 million in process improvement, $15 million in facility consolidation, and $10 million in expense reduction. Income investors might like Hasbro with its good dividend yield of 3.4%.

JAKKS Pacific is the smallest company among the three. It is trading at $6.30 per share with a total market cap of around $138.5 million. As its EBITDA is negative in the past twelve months, its EBITDA multiple is not valid. The price-to-sales ratio is only 0.23.

Recently, the company's share price plunged as much as 37% after its sluggish second-quarter results. In the second quarter, the revenue declined 27% to more than $106 million while the loss per share came in at as much as $2.14. Moreover, the company also lowered its full year revenue guidance, from a range of $694 million-$700 million to $620 million. The full year net income guidance was also reduced from a profit of $0.63 - $0.68 per share to a loss of $2.56 per share. 

Several months ago, billionaire Patrick Soon-Shiong accumulated $9 million worth of shares of JAKKS as he wanted to develop the next generation of interactive technology-based toys, through a joint venture named DreamPlay Toys LLC, between Soon-Shiong’s NantWorks LLC and JAKKS. NantWorks’ iD image recognition technology was reported that it would be able to recognize speech, video, 3D objects and data, and it could be incorporated into DreamPlay products along with Disney’s characters.

If Soon-Shiong’s products become a boom in in the marketplace, JAKKS could be a huge winner for investors. However, it is quite hard to figure out the probability of its success now.

My Foolish take

Income investors could choose both Hasbro and Mattel for their portfolios with their decent dividend yields and strong global toy brands. Among the three, I like Mattel the most, thanks to its highest profitability level, with the highest ROIC at 16.52%. The ROIC of Hasbro ranked second, at only 8.8%, while JAKKS generated a negative ROIC at -30.74%.

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Anh HOANG 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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