Toys With a Media Kicker

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

Hasbro (NASDAQ: HAS) is the second largest publicly traded toy manufacturer. It has seen its shares come under pressure of late and now yield nearly 4%, notably more than its main competitor Mattel (NASDAQ: MAT). While toy sales are the core of the business, the company is making an interesting foray into content using its collection of well-known brands to make such things as cartoons and movies. That's a media kicker that should set the company apart from its main competitor.

Toys, Toys, Toys
Hasbro is about one third the size of Mattel. However, its collection of name brands is no less impressive than its rival's, with industry leading names like Transformers, NERF, Playskool, My Little Pony, Tonka, GI Joe, and Play-Doh. It also has a massive library of game brands, including Monopoly, Clue, Candyland, Risk, and the more recently acquired Wizards of the Coast collection, which includes the highly popular Magic the Gathering game. This is an impressive lineup that gives the company notable clout in the toy industry.

One important differentiating factor between the two toy companies is the extent to which Hasbro has embraced media. It has a division that creates cartoons around its brands, including Transformers, My Little Pony, Play-Doh, and Pound Puppies, among others. This content is distributed across multiple platforms, including the Internet, via Netflix (NFLX) and others, and multiple television channels. One key channel is The Hub, a “multi-platform” partnership with Discovery Communications (NASDAQ: DISCA).

The Hub joint venture gives Hasbro an immense amount of control over how its brands are promoted. The content that is shown here and on other channels also helps to create organic demand for Hasbro's toys. In some ways, it's better than the old Soap Operas, since the entire show is an advertisement. As the company expands this effort, it will build a treasure trove of content that it will be able to use again and again.

For The HUB, the content is desirable because it unites the toys with which kids play with the channel. The benefit is pretty obvious: if a child likes My Little Pony, he or she will probably love the TV show. Thus it’s a win-win for Discovery and Hasbro.

Movies, big screen, direct to video, and video games are other areas where Hasbro has been very active. At the end of the day, putting all of these efforts together creates a massive brand identity and portfolio around what were once just seen as kids’ toys. These brand identities, then, start to compound, to some extent, with each piece building on the others. This should be a key business driver over the long term.

A Little SWOT
With the shares trading down to a yield of around 4%, I decided to take a deeper look at the company using a strengths, weaknesses, opportunities, and threats analysis. A SWOT, as it’s called, is an easy to use tool to help you look at a company's good and bad attributes. All it requires is creating a short, but thoughtful, list of strengths and weaknesses, which are both internal factors, and opportunities and threats, which are both external factors. Below is the SWOT I created:

Strengths (Internal)

  • Second largest toy manufacturer, providing economies of scale.
  • Well-known brands, including Transformers, NERF, Playskool, My Little Pony, and Play-Doh brands.
  • Important industry relationships for licensing.
  • Aggressive move into media space with cartoons, movies, and video games.
  • Move to create a collection of sales channels around key brands (Transformers toys, for example, have movies, a television series, video games, and assorted licensed products, such as shirts and bedding, around it).

Weaknesses (Internal)

  • Material portion of sales generated by just three customers (Wal-Mart, Target, and Toys-R-Us).
  • Target customer market limited in size and reliant on others for purchases.

Opportunities (External)

  • Expansion in foreign markets with growing middle-class populations.
  • Potential to monetize media library in new ways as technology advances.
  • Potential to expand sales channels around additional brands.

Threats (External)

  • Low barriers to entry in toy industry.
  • Target market becoming increasingly sophisticated in toy selections.
  • Economic cycles can hurt sales of largely discretionary toy purchases.
  • Consolidation in the media industry could result in the loss of important licensing contracts.
  • Input cost increases.

The Other Guy
Mattel has some of the biggest brands in the toy space, including Barbie, Hot Wheels, and Fisher Price. It is about three times the size of Hasbro. However, its size doesn't give it any more buying or selling power, or increase its resistance to new competition. So both companies are, effectively, on equal ground in the industry. So there's little benefit to investors from going with the larger company.

The big difference between the two is that Mattel hasn't been as aggressive in its media ventures. While this isn't likely to hamper its big brands, it could be a strategic disadvantage over the long term. With a higher multiple than Hasbro, it appears that the market is discounting the importance of Hasbro's media push. That would seem to make Hasbro the better option. With a yield nearing 4%, now could be an opportune time to invest.

Yours,


ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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