More Upside: Hasbro or Mattel?

Hasbro (NYSE: HAS) delivered a better-than-expected quarterly profit Monday morning, one trading day after larger rival Mattel (NYSE: MAT) was pummeled for letting down its investors.

Earnings climbed 11% at Hasbro, to $0.29 a share, just as analysts were expecting the toy maker's bottom line to drop from last year's $0.26 a share. It's the fifth consecutive quarter in which Hasbro landed well ahead of Wall Street's projections.

It wasn't torrid sales growth that saved the day. In fact, Hasbro's top line took a slightly larger-than-expected hit in coming in at $737.8 million, 7% below last year's second quarter. The net revenue decline isn't really a shocker. Viacom's (NYSE: VIA) Paramount helped out by playing a part in getting Hasbro's Transformers and G.I. Joe franchises into your neighborhood multiplex last summer. The cinematic tie-ins helped boost Hasbro's line of related action figures targeted at boys.

This time around, toys for boys were the only downer. Sales of girls' toys were flat, while the company's preschool playthings and games categories generated double-digit sales growth.

Hasbro was able to overcome the overall decrease in revenue through cost controls and an aggressive share buyback.

On the surface, Mattel's report was even better. Worldwide sales climbed 13%, to top $1 billion. Earnings more than doubled to $0.14 a share. However, Mattel's results are stacked against last year's depressed performance. Analysts were actually banking on net income of $0.15 a share, and supply concerns muddied near-term prospects. Mattel shares tumbled nearly 10% on Friday.

Investors should be warming up to the sector in general. LeapFrog Enterprises (NYSE: LF) is expected to post its first annual profit in five years. Analysts see smaller toy maker JAKKS Pacific (Nasdaq: JAKK) turning profitable in 2010, despite a targeted decline on the top line.

Last month's success of Disney's (NYSE: DIS) Toy Story 3 should also help rekindle consumer interest in some of the retro playthings that Mattel and Hasbro sell. Mattel's Barbie and Hasbro's Mr. Potato Head play prominent roles in the animated flick, which happens to be one of this year's highest-grossing movies.

What should an investor do, if forced into deciding between Mattel and Hasbro? I would go with Hasbro. It's true that Mattel trades at a lower forward earnings multiple. Mattel fetches just 11 times next year's projected profitability, while Hasbro's multiple is slightly higher, at 13. Mattel's dividend yield of 3.6% is also an easier sell for income investors than Hasbro's 2.5% payout.

I still prefer Hasbro because it has been the more consistent performer during the market downturn and has had better success in turning its proprietary toys into hot theatrical properties. Mattel's recent revival with its own Barbie and Hot Wheels franchises is commendable, but it still relies on licensing partners that include Disney and World Wrestling Entertainment (NYSE: WWE) to drive sales, limiting the upside of owned franchises.

Mattel certainly isn't a bad stock -- and Friday's sell-off provides a compelling entry point. However, there's a reason why Hasbro's stock -- and not Mattel's -- is trading higher than it was three years ago. Hasbro's ability to deliver financially and avoid scandalous recalls simply make it the better investment. 

Would you invest in Hasbro or Mattel today? Disagree with Rick's choice? Share your perspective in the comments box below.