Tumult in toyland: Mattel stumbles while Hasbro soars

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With toys flying off the shelves in the annual pre-Christmas frenzy of shopping, it may be hard to believe the world's two biggest toy makers are in very different places.

Mattel Inc., the maker of the iconic Barbie, is stumbling, testing its 52-week lows, with deeply distressing sales figures for its biggest products. Hasbro Inc., with a stable of action figures including the rights to the next Star Wars movie, is firing on all cylinders and hit a 52-week high as holiday shopping kicked into high gear.

To make the contrast even starker, Hasbro announced in September that it had won the rights, starting in 2016, to make Disney princess dolls – including the Frozen line of Annas and Elsas. The current owner of the licence, set to lose hundreds of millions of dollars in revenue, is Mattel.

Given the circumstances, it may come as no surprise that there's little support among analysts for buying into Mattel, despite a healthy dividend yield of 5 per cent. A turnaround – while quite possible – could be years away. But with so many investors piling in to Hasbro in anticipation of the next few blockbuster years, its shares have pushed above their historical valuation. That's made analysts decidedly mixed on Hasbro stock, as well.

The end result may be that the best course of action this month is to buy the toys – but not the companies who make them.

First, though, let's look at Mattel's problems. Mattel isn't just Barbie. It makes the Hot Wheels and Matchbox toy cars, expanded its doll offerings with the American Girl line, acquired the rights to Thomas the Tank Engine in 2012 and owns the preschool products of Fisher-Price as well.

Prior to reporting its fourth-quarter 2013 earnings, Mattel was "flirting with all-time highs," up nearly 18 per cent over the prior year, says analyst Gregory Badishkanian of Citigroup Global Markets Inc. The company had "righted declines in Barbie," developed its Monster High dolls into a billion-dollar brand at retail and successfully completed the acquisition of the company that owned Thomas. But then it reported a North American sales decline of 10 per cent for the 2013 holiday quarter. Elevated inventories at retailers plagued sales well into 2014.

Mattel's third quarter, reported in October, demonstrated the problems that are occurring across nearly every product line. Worldwide sales were down 8 per cent, with Barbie down 21 per cent, Fisher-Price down 16 per cent and American Girl down 7 per cent. (Hot Wheels was the exception, up 5 per cent.)

Stephanie Wissink of Piper Jaffray looks at Mattel and sees a company locked into its historic brands and way of doing things, struggling to adapt to a world where toy-buying parents grew up with more choices than Barbie, a monopoly two generations of moms ago. "Can this company change quickly enough, and in a way that doesn't degrade its brand equity, to connect to Millennial parents?"

Despite those qualms, Ms. Wissink believes "the chances of Mattel turning around are quite good." But, she asks, "What's your level of patience? I think the time frame in which that turnaround occurs is somewhat longer than most people would like to see. If you're looking for a 12- to 24-month return, it's probably going to take a bit longer than that for this company to get its arms around the strategic changes that it needs to make."

Bloomberg data suggest Mr. Badishkanian may be the only analyst of 17 covering Mattel with a "buy" rating. He has a $35 target price that, with the dividend yield, would generate a return in the high teens from Friday's close of $30.88 (U.S.).

He believes Mattel should actually garner a premium to its historic multiple because the company's trends should improve from its recent woes. Another attractive element: the integration of MEGA Bloks, acquired in April from Montreal's Mega Brands Inc. (Mega Brands shareholders are one of the few recent Mattel-related winners, as they received cash rather than Mattel shares in the deal thanks to cross-border tax rules.)

Hasbro, by contrast, is widely seen as the company that gets the future of toy retailing, having already made a push into digital content and mobile gaming. The company is so focused on augmenting the traditional toy business with "content," it was reported to be in talks to buy DreamWorks Animation this fall, a deal that left many analysts cool because of its size and its risks to the company.

Hasbro, however, hasn't needed to own the content to profit. It has the rights to the Transformers action figures, as well as the Avengers and Spider-Man from Marvel Comics. (My Little Pony is its flagship girls' brand.) Hasbro's third-quarter numbers showed strong sales of the boys' toys and a record operating margin for the company, says Needham & Co. analyst Sean McGowan.

The next Star Wars movie is slated for release in December, 2015, which means Hasbro was already expected to show a big gain in 2016 sales. Then came the news of the Disney contract, starting that year. Mr. McGowan says a new Frozen movie is widely expected for 2017.

And, of course, investors have priced much of this in. "We certainly believe that the company's prospects are at least as good as they've been in the past decade," Mr. McGowan says, "but we believe the valuation reflects its upside potential." (He has a "hold" rating.)

Of the 15 analysts covering Hasbro, eight have "buys" and seven have "holds," per Bloomberg, with an average target price of $63. Even combined with a dividend yield of 3 per cent, it's a small return from the Nov. 28 high of $59.42, but the shares' slide to $57.23, as of Friday, makes the potential gain slightly more appealing.

It's just not a potential blockbuster like so many of Hasbro's biggest toys.

Close: $4039 (U.S.), down 04923