Which Toy-Maker Is the Better Bet?

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

Classic games such as Monopoly are easily recognizable by most children and adults alike. The company behind these products and other iconic brands of games and toys, Hasbro (NASDAQ: HAS) competes mostly with its main rival, Mattel (NASDAQ: MAT), for dominance of the toy industry. Mattel also has its fair share of iconic toys, such as Barbies. Toy companies usually constitute a solid long-term investment, so which company offers more value?

Valuations

 P/EForward P/EDividend (Yield)Market Cap (Billions)
HAS 18.58 14.65 1.60 (3.40%) $6.06
MAT 18.87 13.93 1.44 (3.30%) $14.58

Data provided by Yahoo! Finance 7/22/2013

Both companies trade at similar valuations in relation to earnings, and also offer comparative dividends. One noticeable difference is size, with Mattel carrying over twice the market cap as Hasbro. So what about comparative financial strength?

Both companies contain extremely liquid balance sheets, but Hasbro is more leveraged than Mattel. Looking at earnings and revenues, an investor can also clearly see Mattel's leadership in growth when compared to rival Hasbro:

Aligning with the House of Mouse...

Another stalwart in the consumer discretionary sector is Disney (NYSE: DIS). It only makes sense that the nation's largest toy-makers would align themselves with Mickey Mouse and other popular Disney-owned brands, such as Star Wars and the assorted Marvel characters. Both Hasbro and Mattel have a symbiotic relationship with Disney that is very important for both current and future prospects.

Mattel is looking to soak up some success from upcoming Disney movies such as "Planes" which may help boost sales amongst boys, as well as upcoming movies like "Frozen" which features a heroine that will hopefully translate into better Barbie sales -- which have been struggling as of late.

If the past is any indication, a successful string of Disney movies will lead to a successful pick-up in sales for Mattel. Mattel's recent quarterly report was the opposite of impressive, failing to capture the same success that it did in the previous year with Batman merchandise when "the Dark Knight Returns" was released. Mattel has had a relationship with Disney since 1987, and also makes toys centering around classic Disney characters as well.

Hasbro is also looking to get a pick-me-up from Disney. They may even get a much better boost than Mattel as well, after recently expanding their strategic merchandising relationship with the company. The expansion revolves around the Marvel and Star Wars brands, and will run until 2020. The agreeing terms will cover all film and television properties related to both franchises as well.

Disney should also help Hasbro address the current weak demand for Boys Toys that is plaguing its sales. Stars Wars and Marvel characters such as Iron Man and Spiderman tend to be popular. This also gives them an edge over Mattel in this category as well. 

So what's in it for Disney? Hasbro and Mattel producing toys for its licensed characters and movies provides promotion, marketing, and increased demand for its films. It also provides a nice paycheck, with Hasbro alone paying up to $225 million in guaranteed payments to Disney for upcoming Star Wars related films. This is in addition to the $80 million in royalties that Hasbro will pay Disney in relation to Marvel related characters. Disney gets payed royalties and gets great marketing and promotion at the same time, which is good for them no matter how well received the future movies are.

The bottom line

Both Hasbro and Mattel make good investments, as they both offer income-generating dividend yields over 3%. A pick-up in Disney-related movies and characters should benefit both companies and possibly help to offset declining sales. Hasbro seems to have the advantage with Disney, snagging rights to Star Wars and Marvel, which will theoretically boost demand for toys marketed and targeted toward boys. 

Mattel, however, seems to have a better track record for earnings and revenue growth, so it shouldn't be counted out, either. The company also appears to have a stronger, less-leveraged balance sheet as well, and with a market cap over twice that of Hasbro's, they may also be a little safer as an investment overall. Mattel also looks cheaper going forward in relation to earnings.

Mattel also seems to have better growth prospects internationally than Hasbro going forward as well, after boosting its share of the international toy market by 6.3% in the period from 2008 to 2012. Hasbro lost 4.7% of its share in the same time period, according to Euromonitor International's data.  

Mattel currently looks like the better bet.

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Joseph Harry owns shares of Walt Disney. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. 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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