3 Consumer Goods Stocks to Buy and Why

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

Now that the fiscal cliff is behind us, investors can start focusing on a recovery in consumer expenditures. Perhaps one of the most direct beneficiaries of this transition are toy companies and game makers. Mattel and Activision are both engaged in this business, and they have the added benefit of being market leaders. A look at how each company is performing might give you an insight on which one to invest in.

Why You Should Buy Mattel (NASDAQ: MAT)

In terms of revenue, Mattel is the largest toy company in the world. The company recalled millions of toys in 2007 fearing that they may be health hazards due to the elevated level of lead and dangerous magnets. Starting the beginning of this year, Bryan G. Stockton took over as CEO to replace Robert A. Eckert. The company’s business units include American Girl, Mattel Brands, and Fisher Price. Mr. Stockton brings with him a wealth of experience as part of the Toy Industry Association board.

Mattel’s long-term goals of generating cash flow, increasing growth and building operating margins were all achieved under past leadership, and there is little reason to doubt the sustainability of current popular brands like Barbie. A strong point of Mattel is its resilience even in time of recession. It is minimally affected by macroeconomic forces that have affected the other industries.

Industry-wide toy sales have nevertheless struggled, owing to the shift from traditional toys to video games. Mattel therefore needs to invest heavily in digital gaming or it will lose a significant share of the market. Oil prices have also had a significant influence on Mattel’s profit margins because of the increased prices of petroleum. Petroleum is used in making plastic, which is the raw material used by Mattel in toy manufacturing. Despite a recent 4% drop in Barbie sales, there was a 16% increase in American Girl sales.

But Mattel has continued to form strategic partnerships with entertainment companies such as Warner Brothers and Disney and consequently acquiring rights to produce film-based easily recognized by kids. Mattel recently acquired Rovio and HIT Entertainment to help broaden its product portfolio. In 2012, Mattel has had capital gains of 32% apart from paying out $850 million in dividends. Mattel’s size is seen to be a great advantage over other firms in the industry and a good potential for future growth. And at 15x past earnings with a  3.4% dividend yield, Mattel is relatively safe (as mentioned earlier) from any macro shock.

Activision (NASDAQ: ATVI) Is Also Safe, but This Peer Has More Momentum...

Activision, which also specializes in toys, has witnessed a decrease a recent decline in its stock price as a result of increasing pressure form the political arena to ban violent shooting games after the Sandy Hook tragedy. Due to these concerns, it is believed that Activision may end up losing about $410 million to address these regulations. I personally believe the matter of increased regulation has been overblown. The Supreme Court has adamantly defended free speech rights (and the video game industry), and it is unlikely to change its course as a result of public pressure.

In addition, Activision has been active in targeting next-generation media through focusing away from the declining console business. It is set to release two iOS mobile games: Skylanders: Battlegrounds and Lost Islands. In regard to Skylanders, it is worth noting that over 1.5 million downloads of Skylanders: Cloud Patrol were sold. The former will be purchased at $5-$7 while the other one will be available at no charge. Complementary services will be provided by a Bluetooth portal that will allow users to add characters to the game for $50. It is this kind of long-term subscription-based focused that I believe makes Activision as cyclically safe as Mattel.

In a period when others like THQ and even the once invincible Nintendo are going under or struggling (the latter is down 82% over the past five years), Activision has done particularly well for itself. It trades at a respective 14.3x and 11.4x past and forward earnings, just under the 11.8x forward multiple of Electronic Arts (NASDAQ: EA). This is, however, offset by EA's steeper growth curve. EA is expected to grow by roughly 350 basis points more than Activision will each year over the next five years. Specifically, analysts forecast a 14% annual EPS growth rate for EA as it recovers into profitable territory. To get this combination of growth and stability, I recommend a joint investment in EA, Activision, and Mattel. For more safety, go with Mattel; for the most growth, go with EA; and for everything in between, go with Activision.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Mattel, Inc.. The Motley Fool owns shares of Activision Blizzard and Mattel, Inc.. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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