These 2 Toymakers Aren't Playing Around

07/27/2012 8:15 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

While the developed world demographics reflect a slowing market, developing economies are brimming with potential, writes Jack Adamo of Insiders Plus.

We are taking positions in Hasbro (HAS) and Mattel (MAT).

Mattel had a really good week, jumping nearly 10% on a 14% rise in second-quarter EPS, despite headwinds from a stronger dollar in its international business, which provides about half its revenues.

I don’t normally chase earnings, but the company has performed very well over the last ten years and the outlook remains positive for the near term. Items tied to the new Batman movie should drive earnings through the third quarter, and then we have Christmas. Movie tie-ins are a big part of toymakers’ earnings nowadays.

Mattel sports a 3.6% dividend yield at its current price.

The Hasbro story is similar, although the company doesn’t report earnings until this week. Hasbro has quietly trounced the market for the last decade, more than tripling while the S&P 500 went virtually nowhere.

The stock currently yields 4.3%, and dividend growth over the last five years has been a very pleasing 17.6% per year, compounded. Like Mattel, it has multiple tie-ins with films, and half its business is overseas.

The good thing about toys is that people’s hearts naturally open to their children, grandchildren, etc. Discretionary spending remains high in that area, even as adults tighten their purses for personal expenditures. And although toys can be pricey, they don’t compare with the price tags of adult toys like sports cars, jewelry, or a new set of golf clubs.

Birth rates in the developed world have slowed to a crawl (the planet says thank you), but in the developing world they have not. With half of revenues coming from international sources, both Hasbro and Mattel shouldn’t experience any problems with demographics.

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