Mattel, Inc. (NASDAQ:MAT) shares are down more than -43.30% this year and recently decreased -0.26% or -$0.04 to settle at $15.62. Hasbro, Inc. (NASDAQ:HAS), on the other hand, is up 24.18% year to date as of 10/12/2017. It currently trades at $96.60 and has returned 0.02% during the past week.
Mattel, Inc. (NASDAQ:MAT) and Hasbro, Inc. (NASDAQ:HAS) are the two most active stocks in the Toys & Games industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect MAT to grow earnings at a 6.53% annual rate over the next 5 years. Comparatively, HAS is expected to grow at a 9.43% annual rate. All else equal, HAS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 19.17% for Hasbro, Inc. (HAS). MAT’s ROI is 9.00% while HAS has a ROI of 17.50%. The interpretation is that HAS’s business generates a higher return on investment than MAT’s.
If there’s one thing investors care more about than earnings, it’s cash flow. MAT’s free cash flow (“FCF”) per share for the trailing twelve months was -1.31. Comparatively, HAS’s free cash flow per share was -1.20. On a percent-of-sales basis, MAT’s free cash flow was -8.23% while HAS converted -2.99% of its revenues into cash flow. This means that, for a given level of sales, HAS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MAT has a current ratio of 1.40 compared to 2.10 for HAS. This means that HAS can more easily cover its most immediate liabilities over the next twelve months. MAT’s debt-to-equity ratio is 1.28 versus a D/E of 0.95 for HAS. MAT is therefore the more solvent of the two companies, and has lower financial risk.
MAT trades at a forward P/E of 15.92, a P/B of 2.59, and a P/S of 1.01, compared to a forward P/E of 18.26, a P/B of 6.60, and a P/S of 2.38 for HAS. MAT is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. MAT is currently priced at a -22.21% to its one-year price target of 20.08. Comparatively, HAS is -11.51% relative to its price target of 109.17. This suggests that MAT is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for MAT and 2.30 for HAS, which implies that analysts are more bullish on the outlook for MAT.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MAT has a beta of 0.89 and HAS’s beta is 0.89. HAS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.MAT has a short ratio of 6.39 compared to a short interest of 3.77 for HAS. This implies that the market is currently less bearish on the outlook for HAS.
Hasbro, Inc. (NASDAQ:HAS) beats Mattel, Inc. (NASDAQ:MAT) on a total of 9 of the 14 factors compared between the two stocks. HAS , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, MAT is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, HAS has better sentiment signals based on short interest.