Toys Are Not for Kids

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

The toy industry today is navigating muddy waters. A slow economic recovery has chipped away at company revenues and placed a few toy companies under great financial pressure. Let us take a look at the industry leader, Mattel (NASDAQ: MAT), a close competitor, Hasbro (NASDAQ: HAS), and a struggling signature brand, Jakks Pacific (NASDAQ: JAKK).

The big boy

A worldwide leader in the toy design and production industry, Mattel distributes its products through retailers and sells directly to customers. Based in El Segundo, California, the firm is generating most of its revenue from action figures, while it relies on product licenses to avoid having to disburse money on TV advertisements.

In the short run, Mattel has to deal with a tough economic environment, poor performance from Fisher-Price, and age compression. Also, the firm will have to complete the integration of recent acquisitions, and introduce new products that are sitting in the pipeline. For the long haul, the company is expected to continue cost reduction policies, while increasing its international presence and rewarding shareholders.

Financially, Mattel is very strong. Revenues, net income, and cash flow have all been on the rise over the last five years. Debt has also risen in the same period--however, it remains below cash flow levels, and the operating margin today stands at 16.3, well above the industry average.

Trading at 20.3 times its earnings, pulling a 23% discount to the industry average, with a dividend yield of 2.85%, and a price tag close to its 52-week high, the stock is undervalued and attractive. It is recommended to buy Mattel since the company has held its financial strength against economic woes, is a market leader for boys and girls, and holds a portfolio that can effectively respond to changes in market preferences.

Playing for profits

One of the world’s largest toy and board game manufacturers, Hasbro is headquartered in Rhode Island. However, production takes place mainly in Asia. The company made the tabloids due to the acquisition of Backflip Studios last June, which represented its entrance into the mobile gaming business. But can mobile gaming reward shareholders?

Hasbro must battle against age compression, modern entertainment alternatives, higher competition from private brands, and adverse economic environment. Further down the road, the company will continue to use its strong brand recognition to increase market share. Also, cost cut policies, TV marketing campaign, development of joint ventures, and growing international exposure are objectives for the long-term.

The balance sheet for Hasbro is spotless. Net income remained stable during the last 5 years, while revenue and cash flow have seen progressive increments. On the other hand, debt has risen considerably without perturbing the business model. Last, the company's operating margin stands at 13.50%.

Currently trading at 18.8 times its earnings, giving it a 28% discount to the industry average, a dividend yield of 3.13%, while the price is reaching the 52-week high, the stock is undervalued and very attractive. It is recommended to hold on this one, though, until new acquisitions prove to serve evolving market preferences.

Hardly surviving

Children toys designer and producer Jakks holds in its portfolio a wide array of licenses for several lines and brands of toys. Some of its most successful segments are action figures, electronics, dolls, Halloween costumes, kids furniture, seasonal products, construction toys, ride-on vehicles, inflatable environments and tents.

Jakks is currently dealing with an adverse economic environment, which is negatively affecting the firm’s overall performance. Also, the DreamPlay project has diminished operating margins and increased marketing costs. In addition, the company does not have other products that will be introduced any time soon. Finally, age compression has further compromised the company’s future.

The balance sheet does not reflect a good performance for the last couple of years. Today, the firm is losing money while revenues, net income, and cash flow continue a 3 year downward trend.  Meanwhile debt levels did not see much change through the last decade.  Overall Jakks' future is gloomy.

Trading at 25.29 consensus earnings, carrying a 15% premium to the industry consensus, holding a 2.99% dividend yield and a price tag closer to its 52-week low, the stock is a little overvalued and not very attractive. It is recommended to hold since the company is entering financial turbulence, and the economic environment is expected to continue a slow recovery pattern.

Not for kids

Jakks is the most complicated of the three because new products did not have the expected impact on performance. Hasbro is performing better, especially when looking at its finances. Last, Mattel is the best position given its effective portfolio and successful recent product introduction.

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Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of 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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