Why Mattel Has Greater Upside Than Hasbro

August 20, 2015 by 247chrislange

toy car
Source: Thinkstock
As two of the top toy companies in the United States, Mattel Inc. (NASDAQ: MAT) and Hasbro Inc. (NASDAQ: HAS) are often compared to each other. So which company has the best outlook going forward? Oppenheimer believes it has the answer.

Oppenheimer initiated coverage of Mattel with an Outperform rating with a price target of $28, implying upside of 22.2% from current prices. The company has faced significant challenges since early in 2014, including revenue declines in several key products, the loss of important licenses and unfavorable foreign exchange movements. The firm believes these are well-known and pose little risk of negative surprise. In fact, Oppenheimer believes that some improvements in operating performance have been masked by other setbacks, and that the underlying business could be well poised for resumed growth in profits in 2016 and in both revenue and profits in 2017. Additionally, the dividend is considered fairly secure and relatively quite attractive.

Over the past two years, Mattel has experienced revenue weakness in almost every significant product category. But so far this year, the company has seen some signs of strength in Fisher-Price, Hot Wheels and American Girl, and the retail POS movement of Barbie has been encouraging.

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Mattel’s board appears committed to maintaining its dividend, which currently yields 6.6%. Although the implied payout ratio is much higher than historical averages and targets that management has articulated, the company’s cash position and cash flow supports continuing the dividend, ultimately adding to the total return.

As for Hasbro, Oppenheimer initiated coverage of with a Perform rating. In recent years, the company has been executing a well-conceived strategy. Now, it has momentum that is building in markets globally, with exceptionally high visibility for growth. The current dividend yield is 2.3%, and the quarterly rate has increased at a compound annual growth rate just over 20% since 2004. Oppenheimer’s belief that Hasbro may not outperform from here is a function of the stock’s outperformance already. The shares are up over 56% in the past 12 months and now trade at nearly 19 times the firm’s EPS estimate for 2016. This multiple of forward-year earnings per share (EPS) is far higher than the stock has exhibited in recent years, leaving the analyst skeptical of additional price appreciation.

Following a prolonged period, spanning 2008 through 2013, Hasbro struggled to sustain revenue growth or expand operating margins, but the company enjoyed a breakout year in 2014. Even before this, it was clear that Hasbro was likely to enjoy an unprecedented period of solid growth.

Hasbro reported operating margins of 14.9% in 2014, the highest level in at least 20 years. The margins were achieved partly as a result of revenue growth of nearly 5%, a number of favorable shifts in mix, and the benefits of investments made years ago.

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Shares of Mattel were up 1.8% to $22.91 Thursday afternoon. The stock has a consensus analyst price target of $27.75 and a 52-week trading range of $22.32 to $35.50.

Hasbro shares were down 1.6%, at $78.30 in its 52-week range of $51.42 to $84.42. The consensus price target is $84.13.