A Toy Story For Every Investor

Includes: HAS, LF, MAT
by: Mike Perinotti

Consumer spending makes up approximately 70% of the United States' economic activity. And so far this year, consumer spending data has more than impressed economists. Citigroup's Steven Wieting said, "The hard data we follow as economists has held up better than we thought." Despite a payroll tax hike, late tax refunds, and a $0.44 a gallon average increase in the price of gasoline since New Year's, the American people are spending money like never before. And when Americans spend money, it's typically the retail sector that enjoys the biggest boost, or in this case, the retail toy sector.

January auto sales rose 14% from a year ago, gasoline sales up 2.8%, and retail sales rose 0.1% in January to a pace of 4.4% above last year. That includes a 6.5% gain from last year's spending on restaurants (a highly discretionary purchase). Some may argue that the January spending spree is a result of companies increasing dividends in December before income taxes increased for high earners in 2013. Personal income in December grew by the largest amount in 8 years. However, retail sales for the first two weeks of February have already rose 2.8%. Recent data provides ample evidence that consumers are ready to ramp up spending.

A better job market, gains in personal income, low interest rates, rising home prices, and a rising stock market are keeping consumers in stores. And when families start spending money, often times the first place they splurge is their children. This is great news for America's leading toy companies. In addition, the global child population is expected to grow 4% by 2020 to 1.8 billion.

Mattel Inc. (NASDAQ: MAT) announced that they are opening the doors to their leading Barbie Dreamhouse brand. Two life-sized houses - complete with pink elevators, a walk-in "glitterizer," an endless closet and a dazzling "diamond" ring display -- will be unveiled in South Florida at Sawgrass Mills and Berlin, Germany in March 2013. The Dreamhouse has been a fictional Malibu landmark as well as one of the most coveted toy homes for more than four decades and debuted in 1962.

Read the entire press release issued by Mattel Inc. here.

Mattel reported sales of $777 million in 2012 and is on track this year to deliver a 16% increase in total dividends from a year ago. Mattel gained approximately 282% from its October 2009 low to its recent high of $41.31 in 2013.

Leapfrog Enterprises Inc. (NYSE: LF) CEO, John Barbour, has the Company jumping into foreign languages as he expects huge growth in foreign markets. They have created a combination of award-winning, easy-to-use hardware, combined with unique software content made up of engaging games, videos, books, e-books, apps and music to create effective learning solutions for children. And with $120 million in cash, net global sales of $581 million, and a market cap of $623 million, Leapfrog is trading at 1.07 times sales. At $9 a share, Leapfrog is trading at just over 6 times cash flow with a .35 peg ratio. Quite frankly, that's dirt cheap.

Leapfrog Enterprises Inc. has gained approximately 875% from its October 2009 low to its 2012 high of $12.28.

Hasbro Inc. (NASDAQ: HAS) is no stranger to leveraging lucrative licenses and trademarks; everyone is familiar with Mr. Potato Head, Transformers, and My Little Ponies. And paying nearly a 4% dividend, Hasbro is a solid income investment that boasts a history of payout ratio increases and plenty of room to increase its dividend for years. The Company will also be looking to cut their workforce by 10% in attempt to achieve $100 million in savings.

Hasbro Inc. just recently hit a new 52-week high of $41.62.

With the Bush-era tax cuts now made permanent for almost all Americans, consumers "are now more likely to unleash much of the pent-up demand that's been built up over the years," says Bernard Baumohl, economist at Economic Outlook Group. The U.S. toy sector alone has remained strong over the years as retail sales generated an average $21 billion a year since 2010, according to NDP Research Group.


The toy sector is typically one that does not get much attention from the major media and financial outlets, yet the numbers warrant much more than just attention. For the income investment seeker, Mattel and Hasbro provide attractive dividends with solid sales figures. A value investor could argue that Leapfrog is one of the more attractive investments out there while trading at just 1.07 times sales and 6 times cash flow. Either way you look at it, the economic data and toy company sales don't lie; this is one toy story that every investor should read.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LF, MAT, HAS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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