The toys and games industry has been growing for a number of years. Projections for the sector's growth should lead to good returns for investors, especially since toy stocks are modestly valued right now. But which toy stock should you buy?
Hasbro (HAS -0.37%), the maker of Transformers and G.I. Joe, has significantly outperformed Mattel (MAT 2.38%) in recent years. A $10,000 investment in Hasbro 10 years ago would be worth $33,000 today with dividends reinvested. The same investment in Mattel would be worth $9,350. Obviously, Hasbro looks like the better stock to own, but it's not that simple.
Mattel is not the same company it was a few years ago. New management has significantly improved growth on the top and bottom lines, and the maker of Barbie and Hot Wheels is only getting started.
Growth in a growing industry
Hasbro increased revenue 17% in 2021, with adjusted earnings per share (EPS) soaring 41% year over year. But Hasbro reported mixed results to start 2022. While revenue growth of 4% over the year-ago quarter beat the consensus analyst estimate, adjusted EPS of $0.57 missed estimates calling for $0.62.
Analysts expect Hasbro to post revenue growth of 3.8% in 2022, with adjusted EPS flat over 2021 at $5.23. The expectation for slower growth this year is consistent with one forecast that calls for industrywide revenue to fall to $378 billion from $382 billion in 2021.
However, by 2026, total sales across toys and games are expected to rise to $492 billion, according to Statista. This growth is anticipated to be driven by balanced growth across video game consoles, plastic toys, construction sets, puzzles, and dolls.
Mattel's momentum in its largest sales category (dolls) makes it an attractive stock to consider right now. Its dolls segment posted sales growth of 13% year over year in the fourth quarter and 22% for the full year in 2021. Analysts expect Mattel to post revenue growth of 7% in 2022, which is nearly twice the rate of Hasbro.
Dolls are an important category for Mattel, generating roughly twice the level of revenue of its other segments in the fourth quarter. On that note, Barbie was the No. 1 toy property globally in 2021, and management expects to maintain this momentum in 2022, driven by the relaunch of Monster High Barbie later in the year and expanding brand experiences to multiple platforms.
Analysts expect Mattel to grow earnings by 12.3% in 2022 -- notably better than Hasbro's flat earnings growth based on analyst estimates. Mattel's focus on improving operating efficiencies under its Optimizing for Growth program should produce solid earnings growth even if sales come in below expectations due to things outside the company's control, such as higher consumer prices caused by inflation or a recession.
Mattel is priced for better stock performance
Mattel is moving forward on its long-term initiatives to expand its toy franchises beyond just physical toys. As of the beginning of 2022, the company had 14 films in production. It also is ramping up digital game offerings, including a joint venture with Chinese mobile game developer NetEase.
Most importantly, investors can buy Mattel's superior growth at a discount to Hasbro. Mattel currently trades at a forward price-to-earnings (P/E) ratio of 15.8 based on the consensus analyst earnings estimate for 2022. That is a better deal than Hasbro's forward P/E of 17.
Mattel has looked like the better buy for a while now, and Hasbro's stumble to start 2022 reinforces the former's superior value to investors. If you need a value stock to hedge against struggling growth stocks in your portfolio, Mattel might be the one.