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Hasbro, LeapFrog, and Mattel: 3 Toy Companies to Watch

By William Bias – Mar 24, 2014 at 12:15PM

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Look to your child's toybox for investment ideas.

Toy companies Hasbro (HAS -1.41%), LeapFrog (LF.DL), and Mattel (MAT -2.01%) sell toys that educate and amuse children all over the world. Investing legend Warren Buffet said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." With that said, you must look toward what drives these companies as a business and consider what gives them the ability to earn cash over the long term that might translate into capital gains and dividends.

Blockbuster portfolio
Hasbro sells a wide variety of iconic, well-known products that provide entertainment, in the form of transforming toys known as Transformers, time passing board games such as Monopoly and Clue, dolls such as My Little Pony, and licensed toys based on blockbuster films such Avengers and Iron Man. Hasbro's revenue remained basically even in 2013. Hasbro's boys segment, specifically Beyblade and Marvel licensed products, served as a drag on overall revenue, with that segment declining 22% in 2013. By contrast, Hasbro's girls segment increased 26% in 2013. Geographically, Hasbro only increased its revenue on the international front, which grew 9%. Its free cash flow declined 32% during that time frame, due mainly to expanding accounts receivable and inventory. 

Hasbro sits on a pretty solid balance sheet, with cash coming in at 41% of stockholder's equity. Hasbro's long-term debt declined 31% in 2013, translating into a decline of Hasbro's long-term debt-to-equity ratio from 93% to 57%. If Hasbro maintains a lower level of debt, it will decrease interest expense and increase company profitability and cash flow over the long term. In 2013, Hasbro paid out 54% of its free cash flow in dividends. Currently the company pays its shareholders $1.72 per share per year and yields 3.1% annually.

Software and toys that educate
LeapFrog sells educational software and the hardware needed to play it. If you have children, you may recognize some of its learning tablets or apps. LeapFrog went through a very challenging holiday season last year, with discounting and increased competition making an impact on profitability. The company also blames a shorter holiday season. Overall, LeapFrog saw sales decline 5%. However, cash flow-wise, the company performed OK, with free cash flow expanding 3% in 2013. LeapFrog still sits on an excellent balance sheet, with cash comprising 39% of stockholder's equity. The company possesses no long-term debt and does not pay a dividend.

Hot Wheels and Barbie
Mattel brands include Hot Wheels, Barbie, Fisher-Price, and American Girl. Mattel continues to struggle with its traditional brands, with global sales for Barbie and Fisher-Price declining 6% each and sales for Hot Wheels down 4% for 2013, according to its latest earnings release. However, its American Girl segment increased 11% during that time frame, moving the needle on overall revenue upward 1% for 2013. Like Hasbro, Mattel faces market saturation domestically, with North American sales decreasing 2% in 2013. International sales increased 5% during that time frame. 

In 2013, Mattel's free cash flow declined due to an increase in the usage of working capital, a payment of a litigation charge, and increased capital expenditures. Mattel's balance sheet still stands on solid ground, with cash and long-term debt-to-equity coming in at 32% and 49%, respectively. However, it paid out 111% of its free cash flow in dividends in 2013 due to the sharp decline in free cash flow. If the free cash flow situation doesn't improve, it could put the company's dividend at risk. Currently, Mattel pays $1.52 per share per year and yields 4.1% annually.

Things to look for
2014 will probably bode well for Hasbro, as the fourth Transformers movie, Transformers: Age of Extinction, opens on June 27. Investors in Hasbro should expect a hefty boost in overall revenue stemming from increased Transformers toy sales as a result of the awareness created by the movie. As for LeapFrog, company management expects the "current difficult retail conditions" to continue its negative effect on the business throughout 2014. Mattel understood that it needed a new addition to its portfolio and recently acquired Mega Brands. Hopefully the Mega Brands acquisition will add to Mattel's top and bottom lines.

William Bias has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Hasbro, LeapFrog Enterprises, and Mattel. 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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