Goldman Sachs Is Neutral On Toys, But Says Buy Hasbro – Barron’s (blog)

Goldman Sachs’ Michael Ng initiated coverage of the toy sector with a Neutral rating, although he thinks Hasbro (HAS) is a Buy.

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Ng writes that entertainment-backed toys, as well as strength in select categories and developed markets should drive growth in the industry. While the toy makers’ valuations are near highs, they still look reasonable relative to the market—but that also doesn’t leave much upside for multiple expansion. 

Instead Ng argues that investors should focus on the firm’s portfolio of toys, and favoring those with earnings visibility and upside to consensus.

That said, with some 90% of toy manufacturing done in China, supply chain risks abound for toy makers, especially in the current political climate. 

Ng has a Buy rating on Hasbro, which soared on better-than-expected earnings last week:

We see upside to consensus on higher revenue, while HAS’s portfolio of entertainment-backed toys provides visibility into earnings. (1) Boys toys will have an unprecedented amount of movie support including 7 Marvel films in 2018 (vs. 4 in 2016/2017), 3 consecutive Transformers films from 2017-2019, and 2 Star Wars films. (2) Momentum in Disney Princess should drive growth in Girls, including the release of films based on classic hits (e.g., Beauty & the Beast in 2017, Mulan in 2018). (3) Balance  sheet strength creates optionality. HAS’s 2017E gross leverage of 1.6X, creates $940 mn of optionality (8% of cap) vs. leverage target of 2-2.5X.

He has a Neutral rating on Mattel (MAT), calling it a “turnaround story with high expectations:”

Mattel is undergoing a turnaround of several of its core brands including Barbie, American Girl, and Fisher-Price, which should reinvigorate top-line growth and drive margin expansion. That said, consensus estimates are already looking for a meaningful recovery, creating heightened execution risk, particularly in dolls given increased competition from Disney Princess, which should see greater theatrical support in the near term.

Hasbro is up 0.7% to $98.34 in recent trading, while Mattel is up 0.2% to $25.78. 


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