Toys and video games are hardly child's play, as these billion-dollar companies not only produce the latest in gaming entertainment, but also big profits for investors. These companies are capitalizing on increased consumer spending with hot video games such as "Call of Duty," and toys based off highly popular games "Farmville."
Below, I will look at five companies in this sector that could be very profitable long term investments: Activision Blizzard (ATVI), Electronic Arts (EA), Hasbro (HAS), Mattel (MAT) and Take-Two Interactive Software (TTWO). If there's one mega trend I'm willing to invest in right now, it's the long term growth of Internet sales and online gaming. The companies listed below will all benefit from this trend in one way or another.
A multimedia and graphics software company, Activision Blizzard is one of the largest companies in the industry, producing games such as the wildly popular "Warcraft" "Spiderman" and "Call of Duty" franchises for a variety of gaming formats. Headquartered in Santa Monica, CA, the company currently pays a dividend of $0.18 for a yield of 1.5%. With rumors of a 2012 release of "Call of Duty - Black Ops 2," Activision Blizzard seems to be preparing for another solid year. In 2011, the company increased its dividend by 9% as its stock price increased nearly 12%. Although quarterly revenue was down 1.5% year-to-year, the company is debt-free and has total cash reserves of $3.5 billion to go with a free cash flow of $1 billion. I view Activision Blizzard as a buy, especially as consumers see an increase in disposable income and its new titles debut.
Electronic Arts, one of the biggest names in the business, develops, publishes, markets and distributes video games. Featuring games in "Star Wars" and some of the top sports titles, the $5.75 billion company has a solid position in the market. The company is looking at a huge upswing, with a one-year target of $23.75. After a 33% decline in share price since November, the stock is now trading almost $4 per share below its 200-day moving average.
EA has some interesting options for increasing its presence during 2012. The company continues to dominate the NFL with its "Madden Football" series and the company's publishing presence that allows third-party developers to promote games. Although the company only had a modest 1% quarterly revenue gain, the company has a low debt to equity ratio of 23 and nearly $1.8 billion in total cash. This financial stability gives Electronic Arts the time and ability to turn around its undervalued stock. I think that reversal will happen this year.
Hasbro is one of the most famous toymakers in the United States. Founded in 1923, the $4.6 billion company is looking to boost its presence after a sluggish 2011. Currently trading around $36 per share (with a 52-week range of $31.36 - $48.43), the company has a nice one-year target estimate of around $38.50, and it pays a handsome dividend of $1.44, for an impressive 4% yield.
Seeking an opportunity to expand its options, Hasbro is looking to team up with social media giant Zynga (ZNGA) to release licensed toys based on Zynga's games like Farmville, CityVille and Mafia Wars. The move is seen as a way to boost sales, since the company managed a quarterly revenue growth of 4%, while its earnings tumbled 0.6%. Although its forward price to earnings is only 11.1, the company's price to book ratio is not very attractive at 3.3; in addition, Hasbro's debt to equity ratio has crept up over 111, suggesting that it is spending more for each dollar it earns. Until investors can see whether its latest moves will drive up the share price, I recommend holding Hasbro at this time.
Although the toy industry declined by 2% (to $21.18 billion) in 2011, analysts expect growth this year and Mattel is ready to seize the moment. From Hot Wheels to Disney Classics (and everything in between), the $11 billion company is the largest player in the field. It is also still a very good investment. The stock is expected to grow in the next 12 months (target estimate of $35.50). Mattel pays a dividend of $1.24 for a solid yield of 3.8%.
With the expectation of more disposable income, Mattel looks to be a very good buy. In 2011, the company enjoyed a 14% rise in quarterly earnings, while revenue only grew by 1.4%. The company's share price climbed by more than 29% as it maintained a very manageable debt to equity ratio of 59. With its shares trading almost 20% above its 200-day average, growth, dividends and increased demand all make Mattel a very attractive investment.
Take-Two Interactive Software
The multimedia industry is a multi-billion dollar enterprise, and video games represent a huge part. Competing directly with Electronic Arts, Take-Two is finding ways to increase its market share against its larger rival. With a growing list of top games, the company has survived the NBA lockout and is now looking forward to making a big move during 2012. The stock has a one-year target of over $19, forecasting a share price increase of over 25%. Take-Two does not currently pay a dividend.
Although the company's 2K Basketball series suffered as the NBA resolved its labor issues, the league could help kick-start the company this year. Attempting to capitalize on the phenomenal success experienced by New York Knick guard Jeremy Lin, many are speculating on the possibility that Lin could be featured on the cover of the company's 2K13 Basketball game, due out in either 2Q or 3Q of this year. Such marketing could boost Take-Two, which suffered a 29% drop in quarterly revenue in 2011 and 65% decline in earnings. Investors are nervous, as they currently hold nearly 20% of the company's float in short positions. Although things are likely to turn around, the company is not at the same level investment-wise as Electronic Arts at this time. I recommend holding Take-Two at this time, but would not take any new positions in the stock.
Playing to Win Profits
The toy and video game sectors are anything but child's play as companies position themselves to capitalize on increased spending. While I have concerns about Hasbro and Take-Two Interactive Software at this time, I have buy ratings on Activision Blizzard, Electronic Arts and Mattel. Now is a great time for playing to win, and these companies offer the opportunity to do just that.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.