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Toys & Games Industry Near-term Prospects Appear Promising
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The Zacks Toys - Games – Hobbies industry comprises companies that design, manufacture and sells various games and toys. While traditional toymakers primarily focus on marketing and selling action figures, accessories, dolls, youth electronics, and arts and crafts, some of the industry participants also develop and market content and services on video game consoles, personal computers and mobile.
Let’s take a look at the industry’s three major themes:
Amid declining sales of traditional toys, robust demand for educational toys has been quite a relief. Per Market Study Report, the educational toys market is likely to witness a CAGR of approximately 5.2% over the next five years. The global educational toys industry is likely to garner $34,200 million in revenues by 2024, suggesting a sharp increase from $21,991.48 million in 2015. Rising demand for architectural, visual programming and eco-friendly toys is also driving the educational toys market.
The Toys “R” Us bankruptcy in September 2017 left toymakers like Hasbro, Inc. (HAS - Free Report) , Mattel, Inc. (MAT - Free Report) and JAKKS Pacific (JAKK - Free Report) in a spot. Adding to the woes, Toys “R” US liquidated its U.S. operations in 2018 that resulted in a tectonic shift in the retail landscape for toys. After tough couple of years, the industry participants were on track to recovery. However, the coronavirus pandemic is likely to mar the industry’s growth. The industry is likely to be impacted by production disruptions in China, which produces nearly 85% of the global toys, owing to the coronavirus outbreak. Assembling to toys has been impacted on account of quarantines and travel restrictions in China. Hasbro, which sources two-third of its production from China, is making every effort to reduce its dependence on China. Despite the coronavirus pandemic, Habro’s chairman and CEO Brian Goldner said that the company is witnessing robust games business as people are spending time together.
In order to fight the sales slump owing to the liquidation of Toys "R" Us, the industry players are banking on new distribution methods, development of digital-play components, exploration of ventures with other industries and focusing on international expansion. The industry has enormous growth potential in China and Brazil as the countries have a massive population of kids aged 0 to 14 years. Per U.S. Toy Industry Association, out of Brazil’s population of 200 million, 45.7 million are children under the age of 14 years. Meanwhile, China has 236 million kids below the age of 14 years. Emerging markets offer greater opportunities for revenue growth than developed markets.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects.
The Zacks Toys – Games – Hobbies industry currently carries a Zacks Industry Rank #32, which places it in the top 13% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since Feb 29, 2020, the industry’s earnings estimates for the current year have moved up by 0.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry OutperformsSector & S&P 500
The Zacks Toys – Games – Hobbies industry has outperformed the broader Zacks Consumer Discretionary sector and the S&P 500 Index over the past year. The industry has fallen 4.2% over this period compared with the sector and the S&P 500 Index’s decline of 20.3% and 12.8%, respectively.
One Year Price Performance
Industry’s Current Valuation
Comparing the industry with the S&P 500 Index on the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing the industry, we see that the industry is trading at 22.87X, higher than the S&P 500’s 14.92X and the sector’s 15.85X.
Over the last five years, the industry has traded as high as 30.46X and as low as 19.51X, with the median being at 24.57X, as the chart shows.
Bottom Line
Expansion in emerging markets and growth in demand for education toys bode well for the industry. Moreover, initiatives like product launches and shift to more technology-driven toys to revive sales bode well for the industry over the long haul. However, production and supply disruption of toys from China due to the coronavirus outbreak remains a near-term concern.
Mattel sports a Zacks Rank #1. The Zacks Consensus Estimate for 2020 earnings has witnessed sharp upward revisions by 18 cents in the past 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in the trailing four quarters.
Price & Consensus: MAT
Electronic Arts Inc. (EA - Free Report) : The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year growth of 4.6%. The company has an estimated long-term earnings growth rate of 13.1%. In the past 60 days, earnings estimates for fiscal 2021 have witnessed upward revisions by 6 cents.
Price & Consensus: EA
Investors may retain the following stocks for the time being, which currently carry a Zacks Rank #3 (Hold).
Take-Two Interactive Software, Inc. (TTWO - Free Report) , a leading developer and publisher of video games and peripherals, has an estimated long-term earnings growth rate of 12%. The company has a trailing four-quarter positive earnings surprise of 180.5%, on average.
Price & Consensus: TTWO
Hasbro has an estimated long-term earnings growth rate of 13.7%. For 2020, the company’s earnings are expected to improve 32% year over year.
Price & Consensus:HAS
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Toys & Games Industry Near-term Prospects Appear Promising
The Zacks Toys - Games – Hobbies industry comprises companies that design, manufacture and sells various games and toys. While traditional toymakers primarily focus on marketing and selling action figures, accessories, dolls, youth electronics, and arts and crafts, some of the industry participants also develop and market content and services on video game consoles, personal computers and mobile.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Toys – Games – Hobbies industry is grouped within the broader Zacks Consumer Discretionary Sector.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects.
The Zacks Toys – Games – Hobbies industry currently carries a Zacks Industry Rank #32, which places it in the top 13% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since Feb 29, 2020, the industry’s earnings estimates for the current year have moved up by 0.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry OutperformsSector & S&P 500
The Zacks Toys – Games – Hobbies industry has outperformed the broader Zacks Consumer Discretionary sector and the S&P 500 Index over the past year. The industry has fallen 4.2% over this period compared with the sector and the S&P 500 Index’s decline of 20.3% and 12.8%, respectively.
One Year Price Performance
Industry’s Current Valuation
Comparing the industry with the S&P 500 Index on the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing the industry, we see that the industry is trading at 22.87X, higher than the S&P 500’s 14.92X and the sector’s 15.85X.
Over the last five years, the industry has traded as high as 30.46X and as low as 19.51X, with the median being at 24.57X, as the chart shows.
Bottom Line
Expansion in emerging markets and growth in demand for education toys bode well for the industry. Moreover, initiatives like product launches and shift to more technology-driven toys to revive sales bode well for the industry over the long haul. However, production and supply disruption of toys from China due to the coronavirus outbreak remains a near-term concern.
Here area couple of stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Mattel sports a Zacks Rank #1. The Zacks Consensus Estimate for 2020 earnings has witnessed sharp upward revisions by 18 cents in the past 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in the trailing four quarters.
Price & Consensus: MAT
Electronic Arts Inc. (EA - Free Report) : The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year growth of 4.6%. The company has an estimated long-term earnings growth rate of 13.1%. In the past 60 days, earnings estimates for fiscal 2021 have witnessed upward revisions by 6 cents.
Price & Consensus: EA
Investors may retain the following stocks for the time being, which currently carry a Zacks Rank #3 (Hold).
Take-Two Interactive Software, Inc. (TTWO - Free Report) , a leading developer and publisher of video games and peripherals, has an estimated long-term earnings growth rate of 12%. The company has a trailing four-quarter positive earnings surprise of 180.5%, on average.
Price & Consensus: TTWO
Hasbro has an estimated long-term earnings growth rate of 13.7%. For 2020, the company’s earnings are expected to improve 32% year over year.
Price & Consensus:HAS
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>