Christmas in July

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

It’s not too early to think about who will win the Christmas toy wars.  Every holiday season there’s one gotta have it toy that dominates the American parent's subconscious.  That’s why toy companies are as difficult to game as teen retailers. Who knows what children really want?  And as the saying goes, past performance does not guarantee future results.  With a sector so strongly tied to the vagaries of childrens’ deepest desires what do you do?

No parent wants to see a disappointed little face come holiday morning.  And neither do CEOs want to hear the whining of disappointed retail shareholders come the Q1 2013 earnings release.  So who is capturing the hearts and minds of the children?

Best Case Scenario

Mattel, Inc. (NASDAQ: MAT) may have the best shot this holiday season. It is the big dog in toys with an $11.07 billion market cap. They also have the deepest bench of toy lines including: Thomas & Friends (Thomas the Tank Engine), American Girl, Fisher Price, Monster High, Hot Wheels, Uno,  the iconic Barbie and Disney branded Cars. They sell their toys in 130 countries.

Mattel has a P/E of 14.97 and is just 5% below its 52 week high of $34.62. It has a share buyback program in place, manageable debt, a yield of 3.8% and good cash flow to support that dividend.

What is looking good for Mattel is their continuing relationship with Disney (NYSE: DIS). Already they are beginning to sell out of the “Brave” princess Merida doll. And with the American Girl collection, which still is extremely popular, and Barbie line continually updating their toys for girls is the best of the three big publicly traded toymakers.  If you are not the parent of a girl it is hard to impress the importance of that American Girl line which has been marketed to keep the number of popup type stores limited to keep the demand up. The decision to make a line of American Girl dolls that can be individualized to look just like a particular girl  (the Just Like Me line) and for her to treasure, that decision was very canny indeed and will continue to drive American Girl profits.

The line that is worrisome has been Fisher Price which competes with Hasbro’s Playskool. However, the other strong players on the bench should pick up any slack from that division. Mattel reports July 17.

Hasbro Has to Compete

Hasbro, Inc. (NASDAQ: HAS) is Number Two in the toy game. And speaking of games, it owns Parker Bros. and that is part of the reason it received a downgrade from Citi analyst Gregory Badishkanian on June 27. He downgraded to sell with a price target of $31.00. Why? Because he doesn’t think board games such as Scrabble, Monopoly and Operation have a place under the tree anymore and that Hasbro’s deal with Electronic Arts to digital apps of the Parker Bros games may be too little, too late to rescue that division.

Still, Hasbro has a good bench without Parker Bros games with Marvel (including Spiderman), Transformers and Playskool. Unlike Mattel its offerings for girls are not that strong which was  part of the reason for the Citi downgrade. For girls it has Littlest Pet Shop and My Little Pony offerings which have not done as well as the superhero themed toys.

Hasbro has a 4.43 billion market cap, a smaller P/E of 12.49 and a larger yield (4.30%) than Mattel. It is significantly below its 52 week high of $46.01 trading closer to its 52 week low of $31.36.  That said, “The Amazing Spider Man” may be a catalyst for the rest of the summer toy line. Hasbro reports July 23.

You Don’t Know Jakks

Jakks Pacific (NASDAQ: JAKK) is the speculative long shot of the three. It may not even be publicly traded by the holiday season as 5% stakeholder Oaktree Capital Management, LP had made a $20 per share offer and talks are on again, off again. 

With an outsized P/E of 139.30 and a market cap of $413.78 million, it is definitely the riskiest with a more fad oriented line of Hello Kitty and Pokemon themed  toys. It also has Cabbage Patch Kids and Nickelodeon toys. Surprisingly, it does have a 2.5% yield.

Jakks Pacific reported a Q1 wider than expected loss of 65 cents but guided higher for the rest of the year. Trading has been volatile especially after an $80 million self-tender share buyback offering after which it plunged 15%. It is currently trading around $16.32. With a second possible suitor rumors swirl around this name and according to this Fool article may present a special opportunity.

Coal or Candy

So which one leaves you a lump of coal in your portfolio stocking?  The safe bet for a happy holiday is Mattel but Hasbro could surprise on the upside as nine analysts still like the name. Jakks Pacific could outperform all three, but this is the one most likely to leave a lump of coal.

 

 


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney, Hasbro, and Mattel. Motley Fool newsletter services recommend Hasbro, Mattel, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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