‘Tis the season to mull over the magic of toys — a fun and whimsical time for Christmas wishlists, unwrapping and lots of playing. But when it comes to toy stocks, the season gets serious. While some give quite a bit to your portfolio, others are best passed on like Aunt Edith’s fruitcake.
This year, the season doesn’t look particularly bright for toy-makers this year, either. U.S. toy sales through the third quarter were 5% to 6% lower than last year, while fiscal cliff fears could further dampen the numbers … and at the worst possible time. About 55% of retail sales volume is tied to holiday spending.
The good news, though, is that parents traditionally have been willing to sacrifice for their kids — the reason why toy sales didn’t tank as badly as other retail sectors during the Great Recession. The National Retail Federation believes overall holiday sales this year will rise 4% and that 45% of consumers will purchase toys this season. Plus, online toy sales were up more than 20% on Cyber Monday.
Such conflicting numbers make one thing clear for investors in the sector: It’s important to sort through the pile to find the best plays. With that in mind, here are two stocks to play with and two to re-gift:
Mattel (NASDAQ:MAT): Fifty-something Barbie still rules, but most recent quarterly sales slipped 4%. The good news is that Barbie is getting into the construction business, which could make it more appealing to the many Dads doing more of the family shopping. Plus, American Girls, Monster High and Fisher Price franchises all helped boost MAT’s third-quarter profit 22%.
Tie-ins with Disney (NYSE:DIS) and World Wrestling Entertainment (NYSE:WWE) were also a boon and, all in all, CEO Bryan Stockton has managed to charm Wall Street with strong performance in a tough market.
The stock has gained about 34% since January, putting it at a price 13 times forward earnings. That’s not super compelling, but MAT manages expenses well, has strong earnings growth and boasts a reliable dividend with a current yield of 3.3%.
I rank MAT a buy, but you might get a bargain after the first of the year.
Activision Blizzard (NASDAQ:ATVI): ATVI’s chart-topping Call of Duty: Black Ops II launched last month. It’s hard to ignore a title that hit $500 million in sales on the first day and the billion-dollar mark two weeks later despite the industry’s move to digital downloads. Diablo III and World of Warcraft’s latest expansion pack “Mists of Pandaria” should fuel the gaming company’s future fortunes as well, particularly since WoW boasts more than 10 million subscribers.
Plus, Activision looks well-positioned for the future as well. Mobile gaming is expected to bring in more than $15 billion in annual sales by 2015 — great news for ATVI, as the company’s mobile strategy made a big splash earlier this year.
ATVI has a PEG ratio of 1, indicating the stock is fairly valued, and a forward P/E of under 12, which compares well with the industry. Toss in estimates of 50% year-over-year earnings growth next quarter, $3.4 billion in cash, virtually no debt and low volatility, and it’s clear that this is one stock to add to your wishlist.
Hasbro (NASDAQ:HAS): Furby’s return to the market may be boosting sales at this toy-maker, but Transformers and Beyblade franchises have been dragging down earnings. In the last quarter, the bottom line fell almost 4%. On top of that, the gender-based marketing flap over Hasbro’s Easy-Bake Oven and the Elmo sex scandal could both impact sales.
The most attractive thing about the stock is instead it’s current dividend yield of 3.8%. More red flags are waving, though. I don’t like its earnings growth, which was negative last quarter and is expected to be negative around 50% next quarter — or it’s pricey valuation. HAS has a PEG ratio of 1.79 and forward P/E of over 14.
Hold the stock if you’re already in, but watch its next earnings report — scheduled for Feb. 14 — for holidays sales growth.
Electronic Arts (NASDAQ:EA): EA’s sports titles — including Madden NFL and FIFA Soccer — are first rate, as are some other franchises. Still, it’s been a tough year. Medal of Honor: Warfighter sales have been weaker than expected and the U.S. Navy punished members of SEAL Team Six who consulted on the game — hardly good publicity.
EA also cancelled NBA Live 13 after gamers slammed its quality, while last year’s Star Wars: The Old Republic was panned in gamer blogs and went free-to-play in November.
The stock is quite volatile, though, with a beta of 1.11 EA — which also has negative earnings growth — lost around half its value between December of last year and this July, although it has rebounded since then. Despite EA’s talks with Microsoft (NASDAQ:MSFT) about using Windows 8 for its mobile gaming strategy and recent bullish options activity, I’m not buying EA’s rebound yet.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.