Optimism In Toyland: Wells Fargo Likes Mattel, Hasbro Moving Forward

The coming year may be playtime for investors looking into toy company stocks.

The two biggest players in the industry, Hasbro Inc. HAS and Mattel Inc. MAT, both look set for 2019 growth, a Wells Fargo analyst said Wednesday.

Mattel looks better positioned than its rival Hasbro, though, with Hot Wheels driving the optimism and Barbie helping dress up its outlook.

The Analyst

Wells Fargo’s Timothy Conder reaffirmed his Outperform rating on Mattel and raised his target price to $20 from $16. Conder has Hasbro rated Market Perform and lowered his price target to $90 from $95.

The Thesis

Toy stocks look good for the long term in part because of demographics, Conder wrote in a note. Essentially, there are a lot of kids in the world right now and for the next couple of years.

The landscape looks particularly good for Mattel, which reported a strong fourth quarter thanks to its top two brands, Hot Wheels and Barbie. That success may signal continued improvement for Mattel over last year, when overall U.S. toy sales declined.

Something else playing out early this year that could help the toy companies: the declining impact of the liquidation of Toys R Us, which closed its stores last year.

Hasbro reported a fourth-quarter drop in net revenue of 13 percent year-over-year and saw full year revenue drop by nearly as much, with the shut-down of Toys R Us getting much of the blame. The company also missed on earnings.

Wells Fargo believes it will take through 2019 for the industry to fully reconcile the loss of Toys R Us, although Hasbro’s CEO, Brian Goldner, said earlier this week he thinks the impact of the liquidation is over, and the coming year should bring Hasbro back.

Conder cited a few critical items for Hasbro in the coming year.

The digitization of the decades-old trading cards and games business. Hasbro needs to quickly ramp up revenue and profits on things like the digital version of "Magic: The Gathering." “Trading cards business has historically been one of the highest margin business segments, and the digital format should be even more profitable over time,” Conder wrote.

Hasbro needs continued success with NERF, its largest brand.

It also needs continued momentum in partnerships with big entertainment brands like "Avengers," "Star Wars" and "Frozen."

Price Action

Mattel was trading up more than 3.6 percent Wednesday at $17.06 per share. Hasbro shares were down marginally at $89.41.

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