Toy makers Mattel (MAT) and Hasbro (HAS) have seen their stock prices skyrocket in recent months, amid an improved consumer outlook and strong holiday sales. Mattel shares have climbed more than 62% in the past year, and are currently sitting at a new 52-week high, following strong fourth quarter results. Meanwhile, shares of Hasbro, which is expected to report quarterly results on February 9, are up about 32% over the same period.
We last featured the two companies on this page in February, heralding the long-term investment appeal of Hasbro, due to its robust pipeline of toys/games and stringent cost controls. At the same time, we recommended investors sit on the sidelines with Mattel, which had struggled amid slumping sales of its iconic fashion doll Barbie. Since our last report, shares of Hasbro and Mattel have gained 39% and 47%, respectively.
Admittedly, we were wrong with our assessment of Mattel, which has benefited from strong Fisher-Price toy sales and a revitalized Barbie. Although the company, along with other toy makers, faced increased pressure as growing demand for electronics and next-generation video games have weighed on demand for traditional toys, Mattel has battled back in the latest quarter with big sellers such as TMX Elmo.
For the important fourth quarter, Mattel posted net income of $286.4 million, or $0.75 per share, compared with $279.2 million, or $0.69 per share, in the year-ago period. Revenue grew 14.4% to $2.11 billion from $1.84 billion, with sales of its Fisher-Price line, which includes the Fisher-Price, Little People, and Power Wheels brands, up 16% to $8-5 million. Sales of its Barbie line, which have slumped in recent years, rose 3% during the quarter.
The results surpassed Wall Street's expectations, sending shares of the company to a new 52-week high. Analysts on average were expecting the company to post a more modest profit of $0.66 per share on revenue of $1.97 billion, according to Reuters Estimates.
Meanwhile, Mattel posted a 20 basis improvement in gross margin to 48%, as selling, general, and administrative costs increased 110 basis points to 17.5%. Operating margin was up 90 basis points during the quarter to 18.4%.
While Mattel continues to address the recent decline in U.S. Barbie sales and pressure on gross margins, valuation remains a significant concern, given the strong seasonal patterns and steep rise in its stock price. Although our longer-term view for the toy industry remains in tact, we would not be chasing the stock, and recommend investors take some money off the table. At the current price level, shares of Mattel are trading at roughly 17x forward earnings, while Hasbro shares are trading at 19x earnings. With competition in the toy industry remaining fierce, and subject to consumers' fickle tastes and growing popularity of electronics and video games, we would remain on the sidelines with both stocks until momentum returns to a more sustainable level.
--Richard Jahnke, Briefing.com
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