Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Congratulations are in order. On Friday, Jefferies & Co. took a new job! As of today, it's working in the toys department.
This morning, Jefferies initiated coverage of three of the biggest names in toys (although admittedly, since a wave of consolidation hit the industry in the 1980s, there aren't a lot of big names left in toys). Tic-tac-toe, three in a row, the investment banker laid out for investors its thoughts on JAKKS Pacific (JAKK -0.18%), Mattel (MAT 3.16%), and Hasbro (HAS 1.14%) -- and why Hasbro is the only stock in this sector that Jefferies really likes.
Here's what you need to know.
Is it time to go shopping for toy stocks? Image source: Getty Images.
1. Not jacked about JAKKS
Let's begin at the beginning with JAKKS Pacific, a stock best known for such self-described "popular proprietary brands" as BIG-FIGS, Max Tow, and Moose Mountain. (Yeah, I know. Barbie and Star Wars, they ain't.)
With most of its owned brands suffering from less-than-stellar name recognition, Jefferies laments that JAKKS is forced to rely on licensed intellectual property to drive sales of 70% to 80% of its products. Additionally, Jefferies warns that "variability Q/Q in operating performance" is another reason to assign JAKKS a low "risk-adjusted multiple" to earnings.
The most Jefferies is willing to say in favor of this $4.15 stock is that it might rise 8% to $4.50. But even then, the analyst isn't comfortable giving JAKKS more than a hold rating.
2. Miserable Mattel
There's little joy in Jefferies' rating for Mattel investors, either. The last time we heard from Jefferies on the subject of Mattel, the analyst had hung a $32 price target on the company -- but it turned out, the stock was no Barbie Dream House. Mattel stock has since sunk to within pennies of $22, and Jefferies thinks that price sounds about right.
Jefferies is assigning Mattel a hold rating and opining that unless and until it sees "a multi-year framework to make Mattel consistently competitive across its portfolio of brands," there's little hope for this stock to outperform the market.
3. Regarding Hasbro
Last but not least, Jefferies' favorite toy stock today is Hasbro, which costs $109 and change, but which Jefferies sees going to $125 in a year. As explained this morning on StreetInsider.com (subscription required), Jefferies thinks Hasbro has a strong "tailwind" from its "content" (i.e., toys), and a strong balance sheet to its credit.
Over the past three years, data from S&P Global Market Intelligence shows that Hasbro has more than doubled its cash reserves while growing long-term debt only 25%. The net result of this is Jefferies now has $288 million more cash than debt on its books, a fact that Jefferies characterizes as "improving leverage" and "expanding financial capacity."
The most important thing: Valuation
At a P/E ratio of 24.3, Hasbro stock costs a lot less than Mattel's 28 multiple -- and much, much less than the 264 times earnings that a share of JAKKS will set you back. Yet even so, Hasbro is far from a cheap stock.
S&P Global analysts project that the best Hasbro will be able to produce over the next five years is about a 10% annualized earnings growth rate. That's better than the 5% projected growth rate at JAKKS, and not far behind Mattel's 11.5% projection. Still, it works out to a 2.4 PEG ratio on Hasbro stock, which seems kind of pricey.
Slow growth and high prices are both good reasons to avoid Mattel and JAKKS. But to justify buying even Hasbro, Jefferies finds itself forced to assume "multi-year EPS upside." In other words, the analyst has to assume not only that Hasbro will hit the growth targets that Wall Street has set for it (and historically, Wall Street tends to be overoptimistic in growth assumptions, not underoptimistic), but Jefferies also has to assume that Hasbro will grow faster than Wall Street thinks possible in order to justify buying a stock at such a high PEG ratio.
Jefferies may feel comfortable making those kinds of assumptions with your money. I do not.
Just like the rest, Hasbro is too expensive to buy.
