Normally, toys are discussed with kids. However, things go differently in the equity world where you will find every sort of person talking about every other thing. Therefore, I have taken the liberty to discuss toy stocks in this post.
I have decided to discuss two toy stocks in this post: Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT). The outlook for these stocks looks bleak due to three reasons:
1) Tepid domestic industry sales trends
2) Recent decline in their market shares
3) High European exposure
Hasbro
The company announced earnings on April 22. According to consensus estimates, the company was expected to post revenue of $638 million and an EPS of $0.04. However, the company managed to beat both estimates.
The beat came due to the fact that the company’s inventory position is cleaner this year. The Boys division was down 20%, which was offset by a 23% revenue growth in the Girls division and 26% in Games division.
The stock is regarded as one of the highest dividend yielders in the consumer goods sector. The dividend yield of 3.6% has led Goldman Sachs to increase the target price by $4 to $40 (the forward P/E multiple has been raised from 13x to 14x).
Mattel
Mattel, Inc. (NASDAQ:MAT) has almost a similar revenue base like Hasbro’s, especially as its geographical revenue exposure matches to that of Hasbro’s. Therefore, a weak Euro will likely affect the company’s earnings for the year. It reported earnings on April 17.
The company, just like its peer, posted a crushing earnings beat. However, all segments didn’t show growth which was previously expected. The following growth/decline was displayed by the segments:
1) Boys/Girls +11%,
2) Fisher Price -7% and
3) American Girl +32%.
The bottom-line improvement came from SG&A leverage. The stock pays a dividend yielding 3.35%. Currently, the stock is being valued at 15x times forward earnings, which gives us a price target of $42, given that the company is expected to post 2013 EPS of $2.80. The higher multiple for Mattel, Inc. (NASDAQ:MAT) reflects its superior fundamentals as compared to Hasbro, Inc. (NASDAQ:HAS).
The main point of contention is that many believe that the recent rally witnessed by both these stocks; Hasbro (up 26% YTD) and Mattel (up 16% YTD), might not be sustainable given the tepid domestic sales trend. Moreover, the earnings beat by both the stocks has propelled them even higher.
However, this recent rally in no way signifies that the stocks are destined to come down. Similarly, a recent selling-off doesn’t mean that the stock is set to go up, as is the case with both Hasbro and Mattel, Inc. (NASDAQ:MAT)’s peer, JAKKS Pacific, Inc. (NASDAQ:JAKK) which is down 16% since the start of the year (YTD).
JAKKS is expected to announce its quarterly results on April 25. The company is expected to post a loss per share of $0.84 and revenue of $71.2 million. It is interesting to note that despite making a loss, the stock pays a dividend yield of 2.68%. Now, we’ll have to see for how long the company can sustain its dividend. On this point, I will like to discuss the dividend yields across all three companies.
It is interesting to note that Hasbro, Inc. (NASDAQ:HAS)’s historical precedent shows that it has not broken through a 4% dividend ($1.60 payout and $40 price target) despite challenged fundamentals. Similarly, Mattel, Inc. (NASDAQ:MAT) has also adamantly sustained its dividend payouts. This will help both these companies to sustain their stock prices (after the recent rally) given the market’s appreciation for dividend stocks.
However, JAKKS Pacific, Inc. (NASDAQ:JAKK) is new to dividends and we can’t say anything about its dividend sustainability. Seeing that the company is still a loss-making one, it is hard to believe that the company will be able to sustain its dividend, and therefore, an EPS/sales miss in the ongoing season might lead to further deterioration in the stock price.
The Foolish bottom line
Despite some negative sentiment around both Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT), I do not consider them as sells given that their strong dividend yields will help them to retain their recent rallies. However, JAKKS is currently recommended as a sell given its doubtful outlook on both revenue (given industry wide weakness) and dividend sustainability.
The article Toying Around With Toy Stocks originally appeared on Fool.com and is written by Masam Abbas.
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