The Chocolate Bunny Trade
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mattel (NASDAQ: MAT) is on an historic mission that will likely anger some of Wall Street's favorite big caps. Mattel is trying to do away with the barbaric practice of chomping off bunny ears and instead have those little eargnashers (i.e. children) play with the toys from their Easter baskets. As their YouTube video explains, according to the good folks at the Endangered Chocolate Bunny Commission (ECBC) chocolate bunnies are near extinction.
This is probably news to The Hershey Co (NYSE: HSY) and Mondelez International (NASDAQ: MDLZ), which are cranking out the little victims as quick as...er... a bunny. Mondelez' Cadbury division famously runs commercials a few weeks before Easter touting the short term availability of the Cadbury bunny. For Hershey's, Easter runs only slightly behind Halloween and Valentine's Day as a sales driver.
Mattel is offering age appropriate suggestions for toys to fill the Easter basket and coupons to help pay for them, as well as promoting a sweepstakes and a charitable drive against childhood hunger. This may seem like a cute but innocuous campaign, but the candy companies are ruthless competitors. Competition between privately held M&M Mars and Hershey's has been particularly fierce in the past with sniping back and forth. Willy Wonka and The Chocolate Factory by Roald Dahl was inspired by the infamous culture of suspicion and sabotage among British candy companies.
Bunnies vs Barbie
Mattel closed at a multi-year high at $41.67 intraday on March 11. The company's P/E stands at 18.76 with a 3.50% yield. That dividend has grown over 10% annually, and net income has grown just less than half that annually as well. Unlike the tortoise and the hare, its closest rival, Hasbro (NASDAQ: HAS), at half its size, is close on Mattel's heels. Hasbro is racing to 52 week highs with a 4.00% yield and trading at a 15.90 P/E.
Mattel may have bit off more of the bunny ear than they can chew. Sure, moms would probably prefer to give toys than candy, but bucking such a long standing tradition won't be easy. Filling a basket with candy is still cheaper than brand name toys. Especially if you're talking about their most popular brand, American Girl dolls and accessories.
Wal-Mart has done extensive research on Easter basket trends, and its findings are that chocolate is still the number one basket filler, with 60% of shoppers planning to buy chocolate in one form or another. The good news for Mattel and Hasbro shareholders is that Easter is the second biggest season for toygiving, after Christmas. Who knew? Wal-Mart will be featuring a Barbie doll for under six bucks, as well as the popular Beyblade toy from Hasbro. Fun trivia: Wal-Mart will have enough plastic Easter eggs to go around the earth once.
The Easter selling season began Feb. 15, and the National Retail Federation has announced in the past that the average person spends around $18.16 on gifts and $17.29 on candy at Easter. Lest you underestimate the retail impact of the holiday, the NRF had this to say about Easter 2012, "Though the price of gas is on everyone’s mind, Easter is one of the few holidays some consumers are willing to stretch their budgets, especially because many children look forward to treats and new outfits on Easter morning,” said NRF President and CEO Matthew Shay. Americans were expected to spend $16.8 billion on Easter last year. Figures for 2013 aren't available yet, but expect that number or higher.
Candyland: Go With Candy or Toys?
Hershey's, the chocolate and confectionery maker, hit yet another 52 week high on March 5 of $85.50, and is trading at a 29.45 P/E with a 2.00% yield at a 54% payout ratio. Despite the fact that Hershey's is up 41.44% over the last year, the short interest is growing. The five core global brands are Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher, and Ice Breakers. Hershey's has numerous candies and bunnies for sale for Easter, including some of the Cadbury Easter specialties for which it holds a license to manufacture in the US.
Just on Feb. 20 CEO John Bilbrey reaffirmed guidance from their late January earnings release, and said, "We continue to build and execute our consumer-centric business model and are creating a virtuous cycle that is delivering predictable, profitable and sustainable results. We believe the strategies in place support our long-term targets of organic net sales growth of 5 to 7% and adjusted earnings per share-diluted growth of 8 to 10%."
Mondelez spun off Kraft Foods Group last fall and kept CEO Irene Rosenfeld (who snatched Cadbury's right out from under Hershey's twitching bunny nose) and some of the largest brands: Cadbury's, Oreo, Lu, Tang, Jacobs, Trident, Nabisco, and 52 other brands. Mondelez products are sold in 165 countries, and the company's net income for 2012 was $35 billion. Mondelez is trading at a 16.90 P/E with a 1.90% yield. It's a low beta name at .46, and the PEG is 1.43. The company reported on Feb. 13 and reaffirmed organic net revenue growth to be at the 5%-7% range for 2013, and guided higher for full year EPS. One time spinoff charges, which were expected, brought down numbers for the Q4 results.
Mattel, meanwhile, has had some interesting initiatives besides the Easter basket promotion, including trying to teach moms how to play with boy toys in an effort to improve Hot Wheels sales. Hasbro has also had its troubles with boy toys, as their Transformers line regularly slumps between Transformer movies.
Hasbro's share price has not run up as much over the last year as Mattel; Hasbro's up 15.67%, while Mattel has surged 25.97%. Its PEG is higher at 2.01, but what is scary is the 20% short interest for a 4.00% yield. The yield payout ratio is also high at 68.00%. With such a high short interest, good news could prompt a short squeeze.
Who To Bunny Hop With
Mattel has a fairly high yield with less risk than rival Hasbro. Mondelez could also have some upside going forward. But between the two titans of childhood desire, Mattel vs Hershey's, I would go with Mattel even at 52 week highs as Hershey's is looking very stretched and Mattel has twice the yield.
leglamp 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!