Hasbro vs. Mattel: Toy Wars End With a Clear Winner

The toy wars have been a long-waged battle between Hasbro (NYSE: HAS) and Mattel (NYSE: MAT). For many years, the two fought in an endless stalemate.
But over the last year, a clear winner has emerged: Hasbro.
While Mattel continues to suffer falling sales, due mostly to eroding popularity of its flagship Barbie dolls and a lack of new growth initiatives, Hasbro is firing on all cylinders.
Hasbro has taken a 21st century approach to its product line, by focusing on the products consumers want — namely, games, Transformers and Nerf toys, and mobile gaming.
And, Hasbro scored a major coup when it snatched away the Disney (NYSE: DIS) contract from Mattel. This allowed Hasbro to manufacture toys and merchandise related to Disney’s “Frozen” and other animated movies.
For these reasons, Hasbro is growing its sales and dividend at a high rate.

Not Toying Around

Hasbro crushed estimates for the fourth quarter. The company posted $1.6 billion in quarterly revenue, well ahead of the $1.5 billion analysts were expecting. Earnings came to $1.64 per share, which blew away the $1.27 per share anticipated by Wall Street.
Hasbro generated double-digit growth in both revenue and earnings per share last quarter, year over year.
Growth from Nerf, Transformers, and Monopoly boosted Hasbro’s core franchise products, while revenue from games rose 11% last quarter.
Games are a key differentiator between Hasbro and Mattel. While consumers in general are not buying traditional dolls for their children as much as previous generations did, games remain popular with all age groups.
The fourth quarter ended what was a phenomenal year for the company: Hasbro booked all-time records for both sales and profit last year. Hasbro reached $5 billion in sales, for the first time.
Compare Hasbro’s results with Mattel’s, and it’s clear which company has come out ahead. Mattel’s net sales and adjusted earnings per share declined 4% and 17%, respectively, in 2016.

Plenty of Growth Left

Hasbro’s financial performance reached an all-time high last year, and so has its share price. Hasbro stock soared 14% after reporting earnings, reaching a record high of $94 per share.
This rally has elevated its valuation as well, which naturally leads to concerns of overvaluation. While it is sensible to wait for a better buying opportunity, Hasbro should continue to grow in 2017 and beyond. That is because it is just beginning to capitalize on an emerging growth catalyst, which is mobile gaming.
Hasbro’s foray into mobile gaming is through its investment in Backflip Studios. While mobile gaming is still too small of a business to be reported separately, early results are encouraging. Hasbro noted solid performance for two early offerings, Transformers: Earth Wars and DragonVale World, in its analyst call.
Mobile gaming is likely to result in a third major business for Hasbro. In addition to toys and games, Hasbro’s entertainment business is taking off. Revenue in the entertainment and licensing business rose 8% in 2016, with plenty of further growth in store.

Hasbro Stock and Cash Flow

Hasbro generates a great deal of cash flow. Last year, free cash flow rose to $620 million. The company utilizes its cash flow to reward shareholders with $400 million in cash returns last year, through share repurchases and dividends.
After reporting fourth-quarter earnings, Hasbro also increased its dividend by 12%, as a reflection of its strong fundamentals.
Hasbro stock delivers a 2.3% current dividend yield. Admittedly, Hasbro is not a high-yielder. But it still offers a dividend yield that exceeds the 2% average S&P 500 Index yield, with double-digit dividend growth potential.
Hasbro stock does not offer as high a dividend yield as Mattel, but Mattel’s nearly 6% dividend yield has more to do with a deteriorating share price.
Investors who chase extremely high yields are often asking for trouble. Hasbro offers a mix of current income, annual dividend increases, and strong growth from its excellent brand portfolio. For these reasons, Hasbro stock is a much better buy than Mattel stock.
Disclosure: The author is long DIS.

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