Toying With Two Investments

By Chad Henage - January 31, 2012 | Tickers: HAS, MAT | 0 Comments

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When it comes to the toy industry there are two major players, Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT). When you think of classic toy brands like Barbie, Hot Wheels, Fisher-Price, Transformers, Nerf, G.I. Joe, and others you are talking about these two companies' product catalog.

Both companies should be able to leverage those brands into movies, toys, television, and video games. While each company has been able to use their brands to their advantage, what we want to know is which brand is the better buy? We'll keep score and see who comes out the winner. 

Let's start by looking at their valuations, expected growth, and dividends:
 

Things look pretty equal to me. Both companies sell very close to their expected growth rate, both pay decent dividends. (Even = 1 point each) 

How are both doing as far as meeting or exceeding analyst earnings estimates? Hasbro has missed analyst estimates in three of the last four quarters. Mattel on the other hand has beaten estimates two of the last four quarters. So in that comparison Mattel seems to have the advantage. (Hasbro 1, Mattel 2)

If we look at the cash flow statement for each company we find that Hasbro has averaged positive cash flow of $26.3 million in the last four quarters. This positive cash flow includes capital expenditures and paying dividends. Using this same measure Mattel has actually had a negative average cash flow of $20.6 million in the last four quarters. (Hasbro 2, Mattel 1)

Dividend growth is also important so let's see what each company has done in the past three years. Hasbro has raised its dividend by an average of 14.5% the last three years. Mattel, on the other hand, has raised its dividend by an average of 7.56% in the same time frame. (Hasbro 2, Mattel 1)

Finally, let's look at the balance sheet and see which company is stronger. To give us an even playing field we'll use debt-to-equity ratios. Hasbro's debt-to-equity ratio is 1.02 versus Mattel comes in at 0.37. (Hasbro 1, Mattel 2)

So the final score is 7 for Hasbro and 7 for Mattel. On the surface it looks like a tie. When something like this happens I look for other clues. In this instance Mattel has two advantages over Hasbro that might not be obvious. First, Mattel has the stronger past growth rate at 5.74% versus 4% for Hasbro. History many times is a good guide to future prospects.

Second, with less leverage and a higher expected growth rate, Mattel has more flexibility to increase their dividend going forward. Because of these two factors, I give the slight edge to Mattel. Check into each company, and see if you should play around with adding one or both to your portfolio.

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