Toy Companies Demographically Well Placed?
February 3, 2010
Since toys stocks peaked in the year 2000, the sector has frustrated investors. Wall Street analysts promised them higher revenue on the back of Boomer second-time round Dads, or Grandparents spoiling the little ones with sack loads of toys.
Sadly, they forgot to check the demographics, a common occurrence amongst financial analysts. If they had they would have found the landscape rather mixed. The U.S. consumer table below shows that the number of 0- to 5-year-olds fell by 3.5 percent from 1995 to 2000, and the number of 6- to 10-year-olds fell by 3.5 percent from 2000 to 2005. Also, both Mattel (MAT) and Hasbro (HAS) were selling on peak Price to Sales ratios, with Mattel at 3.2 and Hasbro at 1.4.
If we look out over the toy demographic landscape between now and 2025, we can see good growth over all age bands from 0 to 20, with the important 11- to 15-year-old bracket showing double digit growth.
Neither of these companies sell on Price to Sales ratios of below 0.2 as they did in the mid 1970s, however, they are attractively priced below 1.0, with Mattel at 0.9 and Hasbro at 08. If we factor in their high Returns on Equity (Mattel 53.4% and Hasbro 41.9%) they look very attractively priced. We await February 8 for Hasbro earnings and further good news. Consensus expects 81 cents for the fourth quarter and $2.20 for the full 2009 year.
Toy Sector Background
After the weakest holiday season in decades in 2008, when sales slipped 11 percent and profit slid by half, Mattel rode the coattails of the 12 percent increase in sales of Barbie dolls to post fourth quarter 2009 net income of $328.4 million, or 89 cents per share. Revenue rose slightly to $1.96 billion from $1.94 billion in last year's fourth quarter.
For the full year, earnings per share were up to $1.46 from $1.04, net income was $528.7 million versus $379.6 million the previous year, and only revenue slipped, from $5.92 billion to $5.43 billion for the recent full year just ended. Both the quarter and the full year showed the promise of a turnaround at Mattel, if not the toy industry as a whole, from the dismal 2008.
These results could have been boosted by Mattel's new "Mind Flex Game." This sold out in November and is to be launched globally in 2010. We believe that Generation Y will love it, and it should be a "Kindle" winner for the company.
Mattel is still the leading toymaker, although it has been pressed by number two Hasbro. Hasbro, which reports earnings on February 8th, still shows estimates for a relatively flat year ahead - though this could change. Many investors prefer Mattel, due to the strength of its powerful traditional brands such as the iconic Barbie and Hot Wheels. Mattel also keeps evolving these brands, introducing products like the Fashionista Barbie line plus accessories.
Hasbro often strives for trendy creative alliances and production deals. It has toys like Transformers and the cool new Iron Man 2 toys which are set to debut, so Hasbro is sometimes considered a bit more cutting edge. It's a case of taking your pick, as both companies shine in a reasonable economy.
Source: Ned Davis Research
