Jumpin' In Their Jammies

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

Already the Wal-Mart, Toys R' Us, and Kmart big toy books are out and investors have a pretty good idea what toys will get the kids jumping up and down in their jammies.

Hasbro (NASDAQ: HAS) has one of the hottest toys this year, the Furby, all souped up and able to sync with iPads and iPhones. Goldman Sachs downgraded the name in mid-October citing their toys are generally more oriented to boys and are not big sellers, but they couldn't have known about the Disney purchase of Lucasfilms' Star Wars franchise with licenses for the toys held by Hasbro. Not to mention, the yield just surpassed 4% so the name is getting renewed attention. With its 13.60 P/E, Hasbro is looking better since it reported earnings on October 22. It beat by two cents on EPS, but revenues were a little lighter than analysts expected. Still, now you know where you stand. Also, Hasbro's dividend has steadily increased over the last three years.

However, Hasbro's stock repurchase plan at these higher prices seems foolhardy and fellow Fool Ken Johnson has some issues with CEO Brian Goldner's restricted stock unit bonus for share price performance. I tend to agree that Hasbro should pay down its debt of $1.66 billion with their total cash, only at $696.73M. Most shareholders would rather see a rising dividend (payout ratio of 51%) and paying down debt than share buybacks.

Still, the company is moving into the 21st century with strategic partnerships to develop digital games with Activision, Electronic Arts, Majesco, and Perfect World among others. It has also updated some of its classic board games into electronic versions. All in all, Hasbro may be a better way to play the gaming space than beleaguered names like Zynga or Gamestop.

Mattel (NASDAQ: MAT)  reported Q3 earnings in mid-October that were impressive, beating expectations by $.05 per share with net income up $65 million from a year ago. The best numbers came out of the American Girl and Fisher-Price divisions. Iconic Barbie was a losing division and Hot Wheels went flat. But Monster High dolls are already selling briskly before the holidays. CEO Bryan Stockton also said on the call that early layaways were a positive for the company and maintaining inventory shouldn't be a problem.

American Girl sales were outstanding, up 16%. The catalog just came and after seeing it, it comes as no surprise. (I save everything for stock ideas). Unless you know a little girl between 3-13 you might not be aware how expansive the collection is with dolls for every race represented and different historical eras as well as dolls with disabilities, like a blind doll that comes with a stuffed service dog. There are dolls with overnight orthodontia appliances, hearing aids, casts, crutches, virtually a doll for every life situation a young girl might encounter. Did I say expansive, I also meant expensive. At a dozen bricks and mortar American Girl stores (located in high-end malls) said little girl can make an appointment with a personal shopper!! The catalog also features camping tents, pets, and matching outfits for the doll and her little girl. There are reproduction period furniture sets and a mini baby grand piano. Girls can also order an individualized doll to look like themselves.

This will definitely date me, but one can even buy a doll size 1974 VW Beetle, just like the first car I ever owned for their 1974 era Julie Allbright doll, only $475 dollars for both doll and car. I think that's what I paid for that car used, back in the day.

Enough already about American Girl, let's hear some numbers. Mattel's P/E is a little better than Hasbro at 15.12 and the yield is 3.40% with a 48% payout ratio. You can catch some of that yield before the ex-dividend date of November 26. The return on assets is better at Mattel as are the margins and return on equity. The short interest is lower at 1.90% and decreasing compared to the 12.60% short interest at Hasbro.

There are a few buts: Mattel's debt to cash is not much better than Hasbro at total debt of $1.65 billion to total cash of only 282.10 billion for a 1.98 ratio to 2.33 ratio respectively.

Another but: there has been some insider selling in Mattel lately, that is concerning, like the 66,000 shares sold by EVP Geoff Massingberd at $37.75, just about the 52 week high, on October 19. Maybe his daughter wanted to buy the entire American Girl catalog, it is pretty pricey. There's more, another EVP, Timothy J. Kilpin, also sold 12,439 shares for $37.60 per share. That makes me think that the $37.70 level is a ceiling for the share price for the short-term.

That said, Mattel and Hasbro are both doing much better than competitor JAKKS Pacific (NASDAQ: JAKK) with a -$0.21 EPS and net income of -$5.36 million. Jakks is much smaller with a market cap of 379.31 million, a tenth of Hasbro's which itself is a third the size of Mattel. How they can afford their yield of 3.10% is a conundrum, but the ex-dividend date is December 12 if you're interested. The forward P/E is 16.39.

The company reported their Q3 earnings on October 23 and disappointed on revenues but beat on earnings per share. JAKKS has some popular brands like Cabbage Patch Kids (they're baaack!), Pokemon, Hello Kitty, some Disney lines, and other games and novelty toys for boys and girls.

Still, their profit margin is -0.80% and their return on equity is -1.44%. No wonder the short interest has doubled in the last month and now stands at 17.60%.

What'll Be Under The Tree

That's what it all comes down to for toymakers, accounting for a good 40% of yearly sales. Mattel and Hasbro products will be wrapped up nice and shiny. I'm afraid, however, there won't be as many JAKKS toys under the tree. Even if it had a particularly hot toy this year, their numbers, even with a competitive forward P/E, wouldn't get me jumping up and down in my jammies. Do your due diligence on Mattel and Hasbro and you'll be much happier once Q4 comes around.


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Hasbro and Mattel. Motley Fool newsletter services recommend Hasbro and Mattel. 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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