Invest Like a Girl, an American Girl

Mattel and Hasbro are both well-known toy companies. But which one should you put your money into?

Jul 19, 2014 at 9:00AM

Let me introduce you to Rembrandt--she is a border collie, she weighs 13 oz., she isn't that tall at only eight inches, and is originally from China. She also costs $24, courtesy of Mattel (NASDAQ:MAT). Do you think a $24 toy dog is crazy expensive? You haven't seen anything yet. Look at the American Girl dolls--they cost $110 and are about five times the size of Rembrandt. How can a company like Hasbro (NASDAQ:HAS), which doesn't have Rembrandt and American Girl Dolls, compete with that?

Profit margins and pricing power
Profit refers to the money a company makes from its products. Mattel has a higher profit margin than Hasbro.

CompanyOperating MarginNet Margin
Mattel 17.2% 13.3%
Hasbro 12.2% 7.9%

We don't know what the profit margin is for a toy dog, but we know that Mattel has a high profit margin as a whole. A lot of people find the American Girl dolls adorable, and thus become repeat customers. The dolls can be sold with matching outfits for you and your doll. You can get a little dog for your doll, and your dog can get accessories, and so on, and so on, generating a lengthy purchase history. That's why Mattel has a lot of pricing power. Parents, remember this when you are starting your kid on American Girl dolls -- or just buy the stock.

Company quality
To determine the quality of a stock it's important to see if it has a lot of debt, which is a good measure of how well the company handles cash. Mattel has low debt with a debt/equity (D/E) ratio of 0.5. Mattel has less debt than Hasbro, and a higher return on equity, so it is a better choice for quality. And for some of this we can thank our friend Rembrandt. Good dog!

CompanyROED/E
Mattel 27.8 0.5
Hasbro 21.3 0.6

Mattel doesn't just sell $24 dogs or American Girl dolls; it also sells Barbies, Hot Wheels, Fijit Friends, Polly Pockets, Monster High dolls, movies, electronics, games, puzzles, and lots more! Mattel has many different things for many different ages. Our friend Rembrandt and all of her friends are meant for six to 10 year-olds, Polly Pockets are for three to eight year-olds, and the company's board games like Blokus, Pictionary, and Rock 'em Sock'em Robots appeal to all ages. American Girl Dolls and their pets are for girls from six to 10 years old.

Five years ago I was an American Girl doll customer, but I sold my American Girl dolls, and with that money I bought Mattel stock. The little girl I sold my dolls to was very excited--it took her about 20 minutes to pick out her doll and dog. She loved them all, and her parents probably loved not having to save money for a $124.99 doll. Mattel's American Girl Dolls can vary in price--American Girl dolls are not in the store for very long, so they become collector items that can range from $110 to $300.

Show me the money
Dividend yield is how much you get back from the company, and on this you are looking for the highest number possible. As you can see below, Mattel has a better dividend yield than Hasbro. 

CompanyDividend
Mattel 3.73%
Hasbro 3.01%

The American Girl stores that I have visited were always crowded. American Girl dolls aren't passing fads like Pet Rocks. In my mind they are different. American Girl Dolls were introduced in 1986 and they are still very popular today. Over 25 million American Girl dolls have been sold since 1986.

Visit an American Girl store, and you can immediately see the effects of Mattel's pricing power. People line up to buy the store's products even when they are so expensive, and they have done so for decades. Mattel's stock, on the other hand, is cheap compared to the S&P 500. 

 MattelHasbroS&P 500
P/E 12.7 13.4 19.32

In comparison with Hasbro, one of its biggest competitors, Mattel has a cheaper price (on a P/E basis), less debt, a higher dividend yield, and higher margins. Mattel almost doubles the yield of the S&P 500. It's clear that investing like a girl pays off--just ask LouAnn Lofton.

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Maya Peterson owns shares of Hasbro and Mattel. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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