Mattel vs. Hasbro: Who’s the Star of This Season’s Toy Story?

Since 80% of American consumers� now believe we�re in a recession, it�s white-knuckle time for the retail industry, which desperately needs strong holiday sales. But while Scrooge may haunt the hopes of many Christmas presents, one sector has proven itself resilient in bad times: toys. And that’s good news for big manufacturers like Mattel (NASDAQ:MAT) and Hasbro (NASDAQ:HAS) this holiday season.

Make no mistake, it�s looking pretty grim for retail in general: Industry research firm ShopperTrak on Wednesday predicted November and December sales will rise only 3% — down from last year�s 4.1%.

But parents traditionally have been willing to sacrifice for their kids, so toy sales fared better than the rest of the retail industry during the recession. HAS and MAT have been forced to increase prices this year to offset higher production and raw materials costs, which could encounter resistance from consumers. So which company is best positioned to win the starring role in this season�s toy story?

Recent Earnings

Mattel�s second-quarter earnings increased 56% to $80.5 million. MAT, which next reports earnings on Oct. 14, grew sales by 14% to $1.16 billion. Barbie sales alone rose 12%, while Hot Wheels sales slipped 2%.

Hasbro�s second-quarter earnings were up 33% to $58.1 million. HAS, which next reports earnings on Oct. 17, grew sales by 23% to $908.5 million. Driven by Transformers, boys� toy sales rose 96% to $406.4 million, while girls toy sales declined 11% to $119.1 million.

Girls vs. Boys

Barbie might be 52, but she still reigns as Mattel�s prom queen, helping MAT post its greatest second-quarter growth in more than 10 years: 12%. The company�s entire girls portfolio is dominant, particularly Disney Princess and Monster High. Mattel�s tie-in with Disney/Pixar�s Cars 2 is so far outperforming Toy Story 3.

Hasbro�s boys brands lead the pack with Paramount�s Transformers: Dark of the Moon. Beyblade, Marvel and Tonka also are performing well. HAS also reinvented My Little Pony with its �Friendship is Magic� series last year. One big concern: The company�s game and puzzle revenues are down and HAS still is clearing out 2010 inventory.

International

In the U.S., Mattel leads with about 16% of the market; HAS is second with 10%. With sluggish U.S. sales, both companies are expanding internationally — particularly in Asia. In 2010, MAT�s international sales were $1.56 billion of the company�s $5.86 billion total. Mattel boosted its international sales by 23% in the second quarter.

Hasbro had a bigger share of non-U.S. sales last year: $2.92 billion of the company�s $4.17 billion in 2010 sales were international. Non-U.S. sales rose by 43% in the second quarter.

Fundamentals

At $27.03, Mattel is trading almost 23% above its 52-week low of $22.01 last October. With a market cap of $9.14 billion, it has a price/earnings-to-growth ratio of 0.96, meaning the stock is fairly valued. MAT paid one dividend annually between 2007 and 2010 but has paid three dividends in 2011. Its current yield is 3.6%. MAT has total cash of $418.14 million and total debt of $960 million.

Hasbro set a new 52-week low of $33.82 on Aug. 9 and, at $35.49, is trading nearly 30% below its 52-week high of $50.17 last December. With a market cap of $4.65 billion, HAS has a PEG ratio of 0.77, meaning it is undervalued. The company has reliably paid quarterly dividends, and the current yield is 3.5%. Hasbro has total cash of $604.9 million compared to total debt of $1.42 billion.

Winner

Hasbro, but it�s pretty close. While both companies are solid and positioned for growth, Hasbro�s market penetration overseas trumps MAT�s stronger U.S. sales. Keep an eye on Hasbro�s game and puzzle business, but this stock is a value in the $31 to $39 range.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.