Battle of the Toymakers

 | Apr 01, 2014 | 12:42 PM EDT
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February was a tough month for the toy companies. Both Hasbro (HAS) and Mattel (MAT) put up disappointing results. Hasbro blames it on the lack of toy-related movies, while Mattel's Barbie may well have been caught up some unfortunate sexting scandal. Even worse, between last year's high and today's low, Mattel shares have gone from $48 to $35 to $40. Both of these names offer a dividend of more than 3% -- but, if you're looking to add an income name with capital appreciation, does one make more sense over the other?

Well, Hasbro's recovery has been much better than Mattel's since the February earnings misses, but both names have interesting things to offer in 2014. I do think this comes down to whether you are attracted more toward growth or toward perceived value.

Mattel (MAT) -- Daily

Mattel, for its part, just recently bought Mega Brands, the maker of Mega Blocks, in order to make a run at Lego. That's a $460 million buy for a company with $405 million in revenue -- which actually amounts to a nice boost for Mattel in terms of its price-to-sales ratio, since the stock trades at a higher valuation than that. This may even help the low-teens P/E that Mattel currently sports, which is stronger than the mid-20s level seen in Hasbro. In addition, the company's debt-to-cash ratio is 1.6-to-1 against Hasbro's 2-to-1.

Given all this, one may well think Mattel and its 3.8%-to-3.1% dividend is the clear winner -- but not so fast. Maybe it's the nostalgia talking, since I owned Transformers toys as a kid, but Hasbro is my choice. I won't make you wait until the end. While Hasbro has a higher P/E, and while most of its metrics trail those of Mattel, the growth potential is just so much higher.

Hasbro (HAS) -- Daily

Hasbro's big years come around movies, and there are some great movies this year to drive toy sales. The new Transformers, for one thing, will be hitting the big screen this year -- and I have to say that the trailer looks awesome. Any guy who was a kid in the 1980s is probably just as excited about this movie as kids are right now. One word: Dinobots. Their resurrection will be huge. Dinosaurs plus robots! Seriously, is there anything better than that for a little kid?

Add in the second Captain America movie and the very cool Guardians of the Galaxy, along with the Star Wars mainstay attraction, and Hasbro should have a huge 2014. Based on current prices, I would not be surprised to see the P/E of Hasbro decline below than that of Mattel next year.

The daily charts seem to favor Hasbro right now, as well. The stock is breaking higher out of a long sideways channel, and this channel has tightened the Bollinger Bands nicely, setting up great expansion potential out of the squeeze. The Commodity Channel Index (CCI) is a bit overheated at the moment, but Hasbro looks as if it'll stay strong so long it holds above $54. A successful retest of $55 may cool the CCI enough to allow for some long entries.

But, while I may favor Hasbro, that doesn't mean Mattel is a short. In fact, I could certainly argue in favor of buying the Mattel chart, too, just on the gap-fill potential to $42. The risk here is that the support isn't quite as strong -- although I think that that bottom is in as long as the stock stays above $38.

It is clear that, should we see any Mattel close under $35, you should have nothing to do with this stock. Still, I like the money flow and will consider adding both names for the short term. Hasbro would be more of my longer-term hold, though, while Mattel would make for a shorter-term swing trade.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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