In a recent article, I couldn’t help but harp on the move to digital and how it’s impacting the video game industry. This move is not only changing how the likes of Electronic Arts and Activision Blizzard do business, but also how the physical toy industry operates.
As I develop my thesis on the industry, it’s clear that companies may well continue to see pressure related to the generational shift away from physical toys to the digital world. Thus, the current toy industry will rely heavily on innovation.
Mattel, Inc. (NASDAQ:MAT)’s key brands include include Barbie dolls, Fisher-Price toys, American Girl dolls and books, and Hot Wheels. Sales are expected to be up 4.7% in 2013, thanks in part to renewed interest by consumers in its Fisher Price brand.
Brazil has become the second-largest market for Mattel, Inc. (NASDAQ:MAT), by sales, and the toy company also has its sights set on China. Revenue from international sales advanced 9% during 1Q; and the company hopes to generate over 60% of sales from overseas in the long term.
Number-two toy maker
Hasbro, Inc. (NASDAQ:HAS) is the other major toy company, with brands that include Transformers, Playskool, Monopoly and My Little Pony. The company gets nearly 40% from boys’ toys, including sports-related and action figures. Its other key categories include games and puzzles (30% of revenue), girls’ toys (19%) and preschool toys (13%). The company’s top customers include Wal-Mart, Target and Toys ‘R Us, accounting for 38% of 2012 revenue collectively.
Hoping to address the move to digital, Hasbro, Inc. (NASDAQ:HAS) is looking to put more concentration on entertainment products. The company has a 50% interest in a joint venture with Discovery called the The Hub. Hasbro, Inc. (NASDAQ:HAS) is also has a several-year agreement with Electronic Arts.
The unexpected
The Walt Disney Company (NYSE:DIS), despite being considered a major media company, is also a big competitor for the toy companies. Consumer products only account for 8% of revenue, and includes licensing and manufacturing various products based on The Walt Disney Company (NYSE:DIS) characters and other intellectual property.
Yet, it’s the media segment that continues to drive The Walt Disney Company (NYSE:DIS). And with its size, the company can easily tap international markets. Of its most notable international properties is the Shanghai Disney Resort and Shanghai Disneyland in China.
Revenue is expected to be up 7% in fiscal 2013 thanks to these media networks. Major media networks include ESPN, ABC, Disney Channel and ABC Family. The Walt Disney Company (NYSE:DIS)’s other areas of interest include streaming, where it has deals with Netflix and Amazon.
Thanks to its diversified revenue stream, Disney generates solid cash flow, which it can then return to shareholders. Last quarter, The Walt Disney Company (NYSE:DIS) bought back some 38 million shares worth $2 billion.
Bottom line
Year to date, Mattel, Inc. (NASDAQ:MAT) and Hasbro, Inc. (NASDAQ:HAS) have traded in lockstep on a stock price basis…
…and what’s more is that Mattel, Inc. (NASDAQ:MAT) has been afforded a premium to Hasbro, Inc. (NASDAQ:HAS), until now that is. With Mattel’s recent pullback in its stock price, it now trades at a discount on a P/E basis to Hasbro…
I like Mattel the best given its industry leading position, but the company’s valuation is also compelling. The Walt Disney Company (NYSE:DIS) is a buy based on its vast revenue diversification. I think Hasbro, Inc. (NASDAQ:HAS) is below both of these stocks and would rather hold off on owning it for now.
The article Are These Stocks Worth Playing With? originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Hasbro, Mattel, and Walt Disney (NYSE:DIS). The Motley Fool owns shares of Hasbro and Walt Disney. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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