Mattel, Inc. (NASDAQ:MAT) shares are down more than -32.20% this year and recently increased 2.52% or $0.46 to settle at $18.68. Hasbro, Inc. (NASDAQ:HAS), on the other hand, is up 23.27% year to date as of 11/17/2017. It currently trades at $95.89 and has returned 4.86% 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. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MAT to grow earnings at a 9.87% annual rate over the next 5 years. Comparatively, HAS is expected to grow at a 9.43% annual rate. All else equal, MAT’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 18.99% 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 -0.96. Comparatively, HAS’s free cash flow per share was -2.14. On a percent-of-sales basis, MAT’s free cash flow was -6.05% while HAS converted -5.31% 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
Balance sheet risk is one of the biggest factors to consider before investing. MAT has a current ratio of 1.30 compared to 2.50 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 1.99 versus a D/E of 0.96 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 36.06, a P/B of 4.46, and a P/S of 1.26, compared to a forward P/E of 18.29, a P/B of 6.13, and a P/S of 2.28 for HAS. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. MAT is currently priced at a 22.81% to its one-year price target of 15.21. Comparatively, HAS is -9.26% relative to its price target of 105.67. This suggests that HAS 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 2.40 for MAT and 2.20 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 0.83 and HAS’s beta is 0.88. MAT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. MAT has a short ratio of 6.63 compared to a short interest of 3.61 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 growing fastly, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. HAS is more undervalued relative to its price target. Finally, HAS has better sentiment signals based on short interest.