An analyst initiated coverage of the toy sector Friday, forecasting strong long-term possibilities, but voicing concern about what effects the current market malaise will have.
Stifel Nicolaus & Co. analyst Drew Crum rates the sector "Neutral."
"We don't believe the business to be immune from economic weakness though history suggests toys may be less susceptible relative to other consumer discretionary names," Crum said in a note to clients.
The number of children under age 10 is expected grow over the next five years, and since an average of about $400 is spent each year per child, the $22 billion domestic market could grow as much as $800 million, he said.
Additionally, the number of grandparents is expected to jump across the same timeframe, pushing spending on grandchildren higher, he said. Already grandparents, as a group, spend $20 billion more on their children's children today then they did a decade ago, according to Crum.
Of note, Crum said the federal stimulus checks now being distributed nationwide may not fuel growth in the toy market, as consumers are likely to use the funds as a defensive measure against high gas and food prices, and to pay down debt.
Crum rates LeapFrog Enterprises Inc. "Hold," and said an ongoing restructuring appears to be helping, and that the company "appears poised to return to profitability." Leapfrog makes technology-based educational toys.
On Hasbro Inc., which owns the Playskool brand, Crum rates shares "Hold" and noted its stock has generally been less susceptible to economic weakness.
Mattel Inc., maker of the iconic Barbie doll, received a "Buy" rating.
"Mattel is well positioned to benefit from favorable trends in the preschool category, in addition to growth in international markets, given its brand and scale," Crum said.
And on Jakks Pacific Inc., Crum rates shares "Buy."
The company, which makes products ranging from figures for "The Chronicles of Narnia: Prince Caspian" film to stationery based on the "Dora the Explorer" TV series, will likely be able to surpass its 2008 revenue guidance, he said.
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