Streetwise

Lauren Rudd

Sunday, December 16, 2012

An Old Family Tradition

The clock had just struck 2:00 A.M., and I was considering calling it an evening when a familiar voice rang out. “Still carrying on the old family tradition by writing all night I see, he said chuckling.

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. “And by the way isn’t there usually quite a clatter when you arrive?”

"A dry run with an empty sleigh,” he chuckled. “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."

“Technology has changed the holiday season, he said sadly.” I asked him to elaborate and this is part of what my notes say:

For generations Monopoly money stacked up in piles of pink, green and gold, Hot Wheels raced across floors and Barbie was, well, just a doll. Not anymore. It seems that virtually every toy can light up, talk, walk and sing. They can even sell themselves via motion-activated displays that see you coming and respond with a commercial.

Having tried unsuccessfully to compete with digital devices, toy makers are capitulating. Monopoly money can now be counted on an iPad. Hot Wheels cars can zoom across iPad screens. And Barbie? She’s become a digital camera.

Nonetheless, Hasbro continues to own the rights to some of the most famous names in the toy industry, ranging from Easy-Bake and Twister, to My Little Pony and Transformers. 

Mattel can claim brands such as American Girl and Hot Wheels. And Mattel licenses the right to such names as Mickey Mouse. Meanwhile, Walt Disney plays burns the candle from both ends by letting Mattel produce Disney Classics and the aforementioned Mickey Mouse, while Hasbro has the rights to the Marvel lineup.

Meanwhile, Toys R Us is introducing its own tablet for children. Called Tabeo, it will set parents back $149. However, it does come preloaded with 50 apps including educational titles, e-books, and many of the popular smartphone games. It also has dual cameras, and parents can easily set parental controls to keep online surfing in check.

Toys R Us undoubtedly realizes that after spending $149 on a Tabeo there is a reduced chance of seeing a shopping cart filled with additional purchases. Therefore, Toys R Us would be foolish to cannibalize its more traditional and profitable toy lines unless it sincerely believes it is following the trend of the future.

While Mattel and Hasbro will likely feel some pain as children move away from action figures and board games, do not be overly concerned. Many of the long standing toy brands are not ready to give up the ghost just yet.

My 2011 earnings estimate for Mattel was $2.05 per share with a 12-month target price of $33 per share. There was also an indicated dividend yield of 3.20 percent. Earnings for 2011 came in at $2.17 and the shares recently closed at $37.19 for a 38 percent capital gain.

Mattel’s intrinsic value using a discounted earnings approach is $41 per share, while the free cash flow to the firm model produces an intrinsic value of $58. My 2012 earnings estimate for Mattel is $2.49 per share and $2.74 in 2013, with a 12-month target price of $42 for a 10.6 percent potential capital gain. There is also an indicated dividend yield of 3.30 percent.

My 2011 earnings estimate for Hasbro was $2.75 per share with a 12-month target price of $41. Earnings for 2011 came in at $2.78 and the shares recently closed at $37.77, producing an 8.5 percent capital gain.

Hasbro’s intrinsic value using a discounted earnings approach is $42 per share, while the free cash flow model produces an intrinsic value of $68. My 2012 earnings estimate is $2.85 per share and $2.94 in 2013, with a 12-month target price of $42 for a 12 percent potential capital gain. There is also an indicated dividend yield of 3.80 percent.