Activision, Mattel As Ideal Toy Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If shopping for the little ones has you thinking about toys and video games, do yourself a favor and invest in their producers! There has been a bit of a sell-off in recent weeks from eroding faith in the consumer market amidst the fiscal cliff. But before jumping into stocks with low prices, consider the long-term trends. Is the company making ground (i.e. gaining market share) in key geographies? Is it targeting secular trends or following them? Below, I review several stocks with these questions in mind.
Activision (NASDAQ: ATVI) A Solid Investment
Anyone observing video game stocks in recent days could have seen a noticeable trend: down. Activision and Electronic Arts (NASDAQ: EA) fell 6.7% and 9.2%, respectively, over the past 5 days. The reason? Many blame the slide in value to increased political scrutiny of shooting video games following the Sandy Hook mass killing (my heart goes out to those who lost loved ones). The Supreme Court has looked at the matter several times, and, each time, used the First Amendment to reject the case for banning violent game sales to children. "Free speech" has always been one of this country's most respected principles, and it isn't going to change any time soon--especially not as a matter of constitutional law. For this reason, Activision, EA, and others are safe from a more burdensome regulatory environment. Based on the stock reaction, the market believes, however, that increased regulations will cost Activision $410 million. It will soon correct itself.
One could also associate the decline with a y-o-y fall of 11% and 13% in November domestic sales of traditional video game software and hardwired. But the market has already been made aware of the challenging consoler market, and Activision and EA have taken numerous steps to move away from the headwind and position themselves for secular changes. For example, Activision is releasing 2 mobile iOS games for its hit Skylanders franchise: Battlegrounds and Lost Islands. The former will cost $5-$7 dollars, and the latter will be free to play. There is a $50 Bluetooth "portal" to import characters into the game, which is just another instance of the company building a sustainable stream of recurring business. It is important to note that mobile Skylanders Cloud Patrol sold over 1.5 million downloads and, in early September, was rolled into Amazon's Kindle Fire tablets. With the success of Call of Duty: Black Ops II, which sold $1 billion in the first 15 days (and half that amount in just 24 hours), the company's track record of creating strong titles will carry onto its transition into mobile.
EA has similarly been focused on social gaming and mobile opportunities but, admittedly, has struggled to perform. According to CEO John Riccitello, "Our [fiscal] Q3 looks soft mostly due to Medal of Honor". This is probably the reason why billionaire activist investor Carl Icahn has disclosed a large stake in competitor Take-Two. Icahn is known for going into beleaguered companies and agitating for changes, strategic, corporate governance-related, or otherwise, and creating value in the process. He has yet to take any media worthy action in the Grand Theft Auto maker, but I believe he will soon. If nothing else, this creates bottom-level support for related small-cap peers. At 11.4x past earnings and 12.3x free cash flow with forecasts for 14% annual EPS growth over the next 5 years, EA provides compelling trends at a valuable price.
"Buy" Mattel (NASDAQ: MAT) For Added Safety
The maker of Barbie dolls is a solid investment to make--not for its cheapness but rather for its consistent growth and shareholder-friendly management. The dividend yield currently stands at 3.4%, and management is committed to returning more free cash flow. At 15.3x past earnings, the stock is reasonably-priced and allows for attractive streams of income and growth. Analysts forecast 9.1% annual EPS growth over the next 5 years. Combined with the dividend, this provides an average annual return of around 12.4%--easily worth an active investment, especially since the beta, or volatility, is 10% below the broader market.
There are several other reasons why investors should buy Mattel's stock. First, though toy spending is reportedly decelerating, Mattel is the least vulnerable due to the resiliency of its brands. In the October quarter, American Girl sales also grew 16% y-o-y to offset a 4% decline with Barbie. I am also optimistic about the company's licensing rights to top studio producers, such as Disney. This should give the company greater power over securing rights to the timelessly popular Star Wars toys. Further, despite the headwinds, Mattel grew across all regions in the most recent quarter, especially North America. Most importantly, the toy maker gained market share in Euro 5 and the US through August compared to last year. These variables combine to make Mattel a low-risk investment alongside Activision and EA, which face more cyclicality.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Mattel. Motley Fool newsletter services recommend Activision Blizzard 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!