Streetwise for Dec. 20,  2009

Streetwise

Lauren Rudd

Sunday, December 20, 2009

Toy Industry Advice From the "Expert"

“Still carrying on the old family tradition by writing all night I see.” Startled, I turned around. You would think by now I would have learned. "Nice to see you, I was getting worried," I said, with a sideways glance at the old calendar. By the way isn’t there usually quite a clatter when you arrive.

"Reindeer are a bit rusty and landing a sleigh on a rooftop in Florida without snow is no easy task, but they got the hang of it. However, your having a chimney would help, not to mention a fireplace. Playing that roaring fire DVD on a large screen TV is not exactly the same thing. No matter, get your notepad," he sighed, settling back at my desk, "and I will tell you about the state of affairs in the land of make-believe."

“Wait as second,” I said, “You look even worse than last year. I know times are difficult, but this is the holiday season after all. Still no ‘bowl full of jelly’ thing?”

“This has been a disappointing year, he said.” “And despite my best efforts it will likely be a difficult holiday season for both children and adults.”

Furthermore, children are losing interest in traditional toys at a younger age as they turn to video games, iPods, iPhones, and texting for entertainment. Yet, as Richard Gottlieb commented in his column, “Out of the Toy Box,” even video game sales are off from where they were in 2008.

According to PC World, “November retail video game sales sank 7.6 percent from last year's record revenues. Hardware sales were down 13 percent year-over-year, mostly due to the drop in Wii sales...”

Luckily, girls who wanted Bratz dolls will not be disappointed when it comes to availability. An appeals court recently stayed the pending court-ordered recall of MGA Entertainment’s Bratz dolls, allowing the line to remain on store shelves. You may remember that last year a court ruled that Bratz’ creator, Carter Bryant, had been under contract to Mattel when he created the Bratz concept and hence the Bratz product line rightfully belongs to Mattel.

In times of duress, parents want to see their children happy and toys are what make children happy, as evidenced by Barbie. In fact, Barbie remains the top toy for girls, with one being sold about every three seconds. Girls are also excited over the new Barbie Fashionistas, which can strike more realistic poses than a classic Barbie and have hipper clothes and packaging designed to appeal to a slightly older set.

Dolls aside, this year’s most asked for gift is a robotic hamster. The interactive, fuzz balls move around unpredictably and make cute sounds, just like a real rodent. There are five characters ­ Mr. Squiggles, Patches, Chunk, PipSqueak and Num Nums ­ each priced at a recession-friendly $8 to $10. Naturally, there are also lots of extras for sale.

In addition, adults as well as kids have their eye on Mattel's new Mindflex game that uses a player's brainwaves to move a ball that rides on a column of air.

Looking at the two major toy manufacturers from an investment perspective, Mattel’s intrinsic value using a discounted earnings approach is $16.15 per share, while the free cash flow model produces an intrinsic value of $17.92. The shares recently closed at $20.02. My earnings estimate for 2010 is $1.40 per share with a 12-month target price of $24, for a potential gain of 19.5 percent. There is also an indicated dividend yield of 3.8 percent.

Hasbro’s intrinsic value using a discounted earnings approach is $34.27 per share, while the free cash flow model produces an intrinsic value of $58.16 per share. The shares recently closed at $31.63. My earnings estimate for 2010 is $2.25 per share with a 12-month target price of $36, for a potential gain of 14 percent. There is also an indicated dividend yield of 2.6 percent.