Streetwise

Lauren Rudd

Sunday, December 19, 2010

Dear Santa, a Barbie Doll and a Winning Portfolio

“Still carrying on the old family tradition by writing all night I see, he chuckled.”

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” he chuckled again. “Get your notepad," he said settling back at my desk, "and I will tell you about the state of affairs in the land of make-believe."

As I remember it, he said this has been a record year and toy sales are likely to climb 3 to 3.5 percent this holiday season alone, making it the best performance for toy sales since 2006. Keep in mind that retail sales in November and December account for 20 to 40 percent of most retailers' annual revenue, according to the National Retail Federation. For example, the 2009 fourth quarter accounted for nearly all of Macy's profit that year.

Research firm NPD reports all categories of video games sales were up over 2009, with the exception of portable hardware and software. Microsoft's Xbox 360 held onto the lion's share of overall sales, selling 1.374 million units (up an unbelievable 68 percent year-over-year), fending off Nintendo's Wii, which saw 1.27 million units sold (up a trifling one percent year-over-year). Sony's numbers were comparably dismal, with PS3 sales at just 530,000 units (down 25 percent year-over-year).

In the software column, Activision's “Call of Duty: Black Ops” debuted with record breaking sales of 8.4 million units, or 25 percent of all video game software sold in November. NPD says that makes it the 7th best-selling video game of all time.

Luckily, girls who wanted Bratz dolls will not be disappointed this year. In an astonishing ruling, the Court of Appeals in San Francisco overturned a December 2008 order that gave Mattel the rights to most of MGA's Bratz products. A jury had previously found that the designer who created the dolls was working at Mattel when he conceived of the idea, the name and made the initial drawings.

"Even assuming that MGA took some ideas wrongfully, it added tremendous value by turning the ideas into products and, eventually, a popular and highly profitable brand," the appellate panel said.

"It is not equitable to transfer this billion-dollar brand, the value of which is overwhelmingly the result of MGA's legitimate efforts, because it may have started with two misappropriated names."

In times of duress, parents want to see their children happy and toys are what make children happy, as evidenced by Mattel’s Barbie. In fact, Barbie remains the top toy for girls, with one being sold about every three seconds.

Looking at the two major toy manufacturers from an investment perspective, Mattel’s intrinsic value using a discounted earnings approach is $35 per share, while the free cash flow model produces an intrinsic value of $44. The shares recently closed at $25.28.

My earnings estimate a year ago for 2010 was $1.40 per share. I am raising that to $1.75 and $1.95 for 2011. My 12-month target price a year ago was $24, for a potential gain of 19.5 percent. My current 12-month target is $30 for a 15 percent potential capital gain. There is also an indicated dividend yield of 3.27 percent.

Hasbro’s intrinsic value using a discounted earnings approach is $79 per share, while the free cash flow model produces an intrinsic value of $71 per share. The shares recently closed at $48.63.

My earnings estimate a year ago for 2010 was $2.25 per share. I am raising that to $2.70 and $3.15 for 2011. My 12-month target price a year ago was $36, for a potential gain of 14 percent. My current 12-month target is $55 for a 15 percent potential capital gain. There is also an indicated dividend yield of 2.07 percent.