Should You Buy Mattel or Hasbro After Weak Earnings?

Shares of Mattel (NASDAQ: MAT  ) , the world's largest toy company, collapsed when the company reported its fourth-quarter earnings on Jan 31. Demand for core brands like Barbie and Fisher Price crumbled, with both weak store traffic and a shift to electronic devices largely to blame, and a modest 5.5% dividend boost wasn't enough to quell investors' concerns.

Competitor Hasbro (NASDAQ: HAS  ) had a better holiday season, with revenue flat compared to 2012, and shares jumped by as much as 6% on the news. A 16% decline in revenue from the boys' category is concerning, though, and it seems that Hasbro is having some of the same problems that are plaguing Mattel. Are either of these toy companies worth buying?

The results at a glance
Mattel's fourth-quarter sales declined by 6% year over year, driven by a 10% decline in the North American market. Core brands were mostly weak, with sales of Barbie down 13%, Hot Wheels down 8%, Fisher-Price down 13%, and American Girl up 3%. A significant decline in selling, general, and administrative costs led to both operating income and net income rising year over year, but analysts were expecting earnings per share to be even higher. Mattel boosted its dividend by 5.5%, bringing the forward yield to about 4.1% after the post-earnings decline.

Hasbro's fourth-quarter sales were flat, with a decline in the North American segment balanced by an increase in the international segment. Sales in the boys' category fell 16% in the fourth quarter and 22% in the full year, with declines in franchise brands like Marvel the main culprit. Games revenue grew by 2% in the quarter and by 10% in the full year, with Magic: The Gathering and Monopoly both achieving growth. Sales in the girls' category rose 19% in the quarter and 26% in the full year, driven by strong Furby and My Little Pony sales. Adjusted net income rose slightly year over year, and the company boosted its dividend by 7.5%. The forward yield is now about 3.2%.

A clear choice
While Mattel's revenue decline and earnings miss didn't sit well with the market, Mattel looks like a more attractive investment than Hasbro. Here are some key figures worth paying attention to:

Metric  Mattel Hasbro
Q4 operating margin 22.7% 14.3%
P/E ratio 14.3 18.7*
Dividend yield 4.1% 3.25%

*Based on adjusted earnings.

Shares of Mattel are significantly less expensive than shares of Hasbro based on 2013 earnings. Analysts expect both companies to grow earnings at about the same rate over the next five years, and although Mattel had a weaker holiday quarter, one bad quarter doesn't make a trend. The toy industry is not going away, and Mattel is still the leading toy company in the world.

Mattel manages a higher operating margin than Hasbro, the effect of having strong brands with a global presence. While those brands performed poorly in North America in the fourth quarter, this holiday season was difficult for many companies, and I don't think that it points to any long-term issues.

For dividend investors, Mattel is the clear choice, especially after the post-earnings sell-off. A 4.1% dividend yield from the leading toy company with a meaningful economic moat is an anomaly that should be taken advantage of, and while the dividend will likely grow only as fast as earnings, the high yield more than makes up for it.

Hasbro is more expensive than Mattel, although not outrageously so, and without greater growth prospects there's little reason to choose Hasbro over Mattel. Hasbro's dividend yield is still quite a bit higher than that of the S&P 500 index, but it pales in comparison to Mattel's.

The bottom line
After a brutal post-earnings decline, shares of Mattel are priced attractively compared to competitor Hasbro. Mattel has significant competitive advantages, and the extremely high dividend yield makes the stock a good choice for dividend growth investors. While the decline in North American sales is a concern, there's no real reason to believe that Mattel's problems are anything other than temporary.

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