Moreover, toy valuations seem to be a bit stretched. By this I mean, that the stocks are expensive in terms of their trading multiples. Both are currently trading at a 5% to 10% premium to the S&P 500 (INDEXSP:.INX), above their historical relative multiples.
Dividend yields also need to be mentioned. Mattel, Inc. (NASDAQ:MAT) pays a dividend yield of 3.1%. Hasbro pays a dividend yield of 3.4%. Dividend payouts will limit the magnitude of downside potential in the shares (since shareholders like dividend-paying stocks). However, figures show that there is room for declines in both stocks today.
Neither Hasbro nor Mattel, Inc. (NASDAQ:MAT) sits in the 3.5% to 4.0% dividend-yield range today that has typically served as a valuation floor for the stocks. (A declining stock price will automatically increase the dividend yields, taking them to 3.5% to 4% bracket.)
Keeping macro factors aside, Mattel, Inc. (NASDAQ:MAT) has been a solid company with a well-diversified portfolio of brands, something that is not present in Hasbro. With strong momentum in Mattel, Inc. (NASDAQ:MAT)’s core brands, including Other Girls Brands, Monster High and American Girl Brand, its top line is expected to improve in the ensuing quarter.
Moreover, cost initiatives and some strategic acquisitions (one of them is HIT entertainment, a leader in preschool brands; Mattel, Inc. (NASDAQ:MAT) acquired HIT in Feb 2012) have made the company an attractive investment in the toy industry.
Another high dividend-yielder in the same space
Unlike its peers, JAKKS Pacific, Inc. (NASDAQ:JAKK) is down 11% year-to-date (both Hasbro and Mattel have climbed upward.) JAKKS Pacific, Inc. (NASDAQ:JAKK) is expected to announce its earnings on the same date as Mattel, i.e. July 17. The company is expected to post a profit per share of $0.05 and revenue of $147.2 million. It is interesting to note that the company recently started making profits. However, the stock pays a dividend yield of 2.7%. Investors seem to be cautious about the sustainability of the company’s dividends.
JAKKS Pacific, Inc. (NASDAQ:JAKK) suffers from a lack of demand in some of its key products. Some new major products, such as Monsuno and Winx Club, didn’t have the success the company expected, which led to increasing inventories. Moreover, in the short term, there is only one significant launch, Dreamplay products, which — if successful — will impact profits only a few quarters from now. For the time being, the outlook remains bleak for the company.
Final word
Secular and macro reasons for declines in toy demand have surely sent bearish signals to the market. Stretched valuations, foreign-exchange headwinds and flashy estimates from the Street have made life even harder for investors seeking to go long in these stocks. However, new product launches and potential restructurings present some hope for investors in this space. Mattel seems to be the best option in this sector given its well-diversified portfolio of brands, strategic acquisitions and cost-cutting initiatives.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The Real ‘Toy Story’ originally appeared on Fool.com is written by Zain Abbas.
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