Are These Companies Worth a Second Look?

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

Its earnings season! This is a time of the quarter when companies report and Wall Street gives thumbs up or thumbs down based on whether the companies meet or disappoint their expectations (emphasis mine). Sometimes when a company disappoints Wall Street the subsequent decline can give you a better entry point to purchase shares. However, it always pays to do your research to see if a particular company is deserving of your investment dollars.

Toy makers feel the pain

Toy makers Mattel (NASDAQ: MAT) and Hasbro (NASDAQ: HAS) both missed Wall Street expectations in their latest earnings announcements. Mattel’s revenue of $1.17 billion and earnings per share of $0.21 fell below Wall Street’s expectation of $1.22 billion in revenue and $0.32 in earnings per share according to AP. Moreover, Hasbro earned only $0.28 per share with analysts expecting $0.34 per share.

Mattel’s stock price declined 7% after the release of its earnings. Hasbro’s price actually climbed after its announcement due to hopes riding on its new merchandise agreement with Walt Disney.

Mattel’s traditional brands such as Barbie and its Wheels category declined 12% and 6% respectively. Mattel’s newer toy innovations such as Monster High contributed to an increase of 23% in its other girls brand segment.

Hasbro saw a sharp decline in its boys segment due to tough comps stemming from “major motion pictures in 2012” or lack thereof in 2013. Its games, girls, and preschool segments all saw jumps of 19%, 43%, and 4% in revenue.

Two major trends are affecting the direction of this industry. First, the digital world increasingly occupies the child’s play time. Second, blockbuster movies surrounding toy lines tend to boost interest in the products.

In response to the first trend, Mattel plans to release digital Barbie products during the holiday season. The second trend also explains the slumps in Mattel’s traditional Barbie and Hot Wheels segments. Mattel fails to innovate in creating storylines centering on Barbie and Hot Wheels in the face of competition such as Disney’s Cars or Hasbro’s My Little Pony.

Hasbro also understands the importance of the slow shift from physical toy play to the digital world. In response it purchased a 70% stake in the digital game company Backflip. Hasbro can leverage the skills from this acquisition to make games based on old brands to garner attention from the 21st century digital consumer.

In stark awareness of what a major blockbuster film can do for the demand of a product line Hasbro also extended its merchandise agreement with Walt Disney through 2020. Hasbro will continue to pay Disney for the privilege of making toys based on the popular Marvel based films and the upcoming Star Wars films expected later in the decade.

When Wall Street worries

Online auction house, payment processor, and e-commerce platform eBay (NASDAQ: EBAY) earned $0.63 per share which resided within Wall Street expectations. However, management remarks about “headwinds” for the latter part of 2013 stemming from slowdowns in markets such as Europe and South Korea sent the stock reeling 6% after the earnings release.

Wall Street fears are unjustified. PayPal served as eBay’s strongest growing segment increasing payment volume 24%, translating into a 20% increase for segment revenue. eBay’s enterprise segment, which involves helping businesses with e-commerce, increased revenue 11%. Even eBay’s aging auction marketplace segment scored a 10% increase. All of this serves as evidence of the underlying strength of eBay’s businesses.

While the company may face some headwinds over the next few months, over the long-term eBay will continue to generate wealth for shareholders. eBay can capitalize as more and more consumers buy, sell, and transact online.

A Fool looks ahead

Mattel and Hasbro operate in an industry going through a state of transition. Hasbro’s acquisition of game maker Backflip and Mattel’s upcoming Barbie digital products demonstrate that the toy makers understand this fact. Blockbuster films will also play an integral role in the future of the toy making business. Hasbro certainly believes this as evidenced by its extension of a merchandising agreement with Disney.

Mattel needs to follow up and develop more toys centered on sagas on which movies and television shows can be produced. In addition, future toy innovations like Monster High wouldn’t hurt either.

eBay certainly will continue to capitalize on an increasingly web centric consumer base serving as a wealth generating machine over the long-term.

Overall these companies definitely deserve a second look despite short term headwinds.

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William Bias  owns shares of eBay. The Motley Fool recommends eBay, Hasbro, and Mattel. The Motley Fool owns shares of eBay and 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!

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