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3 Stocks to Buy From the Promising Toys & Games Industry

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The Zacks Toys - Games – Hobbies industry has been benefiting from robust demand for smart toys, STEM toys (Science, Technology, Engineering and Math), sports toys, fashion dolls and accessories. The industry participants have been undertaking efforts on the digital front, and focusing on better execution of marketing and promotional initiatives to drive growth. The industry players including Mattel, Inc. (MAT - Free Report) , Take-Two Interactive Software, Inc. (TTWO - Free Report) and JAKKS Pacific, Inc. (JAKK - Free Report) are likely to gain from the aforementioned trend.

Industry Description

The Zacks Toys – Games – Hobbies industry comprises companies that design, manufacture and sells various games and toys. While traditional toy makers primarily focus on marketing and selling action figures, accessories, dolls, youth electronics, and arts and crafts, some of the industry players also develop and market content and services on video game consoles, personal computers and mobile. Some of the industry participants offer video game platforms, playing cards, Karuta, and other products along with handheld and home console hardware systems and related software. Few companies also develop and operate retail and online military simulation games, and provide multiplayer and single-player games.

3 Trends Shaping the Future of Zacks - Toys Games - Hobbies Industry

Pandemic Driving Demand for Toys: Although coronavirus-induced shutdowns have hurt most industries, toy makers have been gaining from the same. With kids stuck at home, parents have been buying toys in bulk to keep the children occupied and away from the TV while they work. While toy buying spree continues across the country, online sales of board games and building sets have also been on the rise. Per the NPD Group, U.S. toys sales increased 16% in 2020. According to The NPD  Group, sports toys, fashion dolls and accessories, building sets, games and summer seasonal toys sales improved 31%, 56%, 26%, 29% and 24%, respectively. According to The NPD Group, U.S. toy industry dollar sales rose 27% between January and April 2021. During the same time frame, unit sales and average selling price (ASP) surged 17% and 19%, respectively.  Most of the toy companies are focusing on bolstering online business. The industry is anticipated to perform robustly in 2021 and 2022.

STEM Toys Gaining Popularity: Amid declining sales of traditional toys, robust demand for STEM toys has been quite a relief. Asia pacific region has emerged as a major growth driver for STEM toys. Countries like India, Malaysia, Singapore, and Thailand are witnessing rising demand for STEM toys. Parents are focusing more on educational toys to teach their children amid the pandemic. Per a Technavio report, educational toys are likely to grow by $28.4 billion during 2021-2025, witnessing a CAGR of more than 14%. The APAC region is likely to contribute growth of 36%. The industry players have been capitalizing on new distribution methods, development of digital-play components, exploration of ventures with other industries and focusing on international expansion to drive growth. The industry has enormous growth potential in China and Brazil as both the countries have a massive population of kids aged 0 to 14 years.

Shipments Disruption & High Costs Remain Concerns: The coronavirus pandemic continues to hurt shipments, brick-and-mortar sales, and delivery of content in order to meet demand. Temporary store closures, product shortages, lower retail inventories and supply chain disruption might hurt the industry. The industry participants’ initiatives including product launches and shift toward more technology-driven toys for boosting sales are likely to drive profits in the long haul. However, costs related to the initiatives might prove detrimental to the industry in the near term.

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 #34, 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. Since Jan 31, 2021, the industry’s earnings estimates for the current year have moved north by 8.8%.

Before we present a few stocks that investors can take a look at, let’s analyze the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector & S&P 500

The Zacks Toys – Games – Hobbies industry has underperformed the broader Zacks Consumer Discretionary sector and the S&P 500 Index over the past year. The industry has gained 2.1% over this period compared with the sector and the S&P 500’s rally of 14.8% and 33.5%, 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 22.62X, higher than the S&P 500’s 21.64X but lower than the sector’s 26.09X.

Over the last five years, the industry has traded as high as 31.37X and as low as 19.27X, with the median being at 26.37X, as the chart shows.

Price to Earnings Ratio (F12M)

3 Zacks Toys Pick to Keep an Eye On

Mattel: Headquartered in El Segundo, CA, Mattel is the world’s largest manufacturer of toys. Robust Barbie brand and Hot Wheels sales are driving its performance. Given a strong product line-up, which includes core brands, licensed brands and lucrative product associations, the company remains well-poised for growth. During second-quarter 2021, it reported double-digit growth in its three power brands Barbie, Hot Wheels and Fisher-Price and Thomas & Friends.

Shares of this Zacks Rank #1 (Strong Buy) company have gained 25.3% year to date against the industry’s decline of 8%. Its 2021 earnings are anticipated to increase 94.4%. In the past 30 days, earnings estimate for 2021 has been revised upward by 15.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: MAT

Take-Two Interactive Software: Headquartered in NY, the company develops, publishes and markets interactive entertainment solutions for consumers worldwide. The company’s growth is primarily driven by its popular franchises — Grand Theft Auto (GTA) and Red Dead Redemption. Notably, GTA accounted for 23% of its net revenues in fiscal 2020. The company’s portfolio strength and robust slate of releases, including Borderlands 3, Ancestors: The Humankind Odyssey and The Outer Worlds, are key catalysts in the long haul.

The Zacks Rank #2 (Buy) company’s earnings estimate for 2021 has been revised upward by 0.7%.

Price & Consensus: TTWO

JAKKS Pacific: Headquartered in Santa Monica, CA, JAKKS Pacific is a multi-brand company that designs and markets a broad range of toys and consumer products. The company has been benefiting from strategic acquisitions, solid international footprint, and focus on innovation and collaborations with popular brands and movie franchisees. In second-quarter 2021, net sales at the company’s Toys/Consumer Products segment improved 45% globally on a year-over-year basis, while sales of Disguise costumes surged 37%.

Shares of this Zacks Rank #2 company have appreciated 62.5% in the past six months. Its earnings for 2021 are anticipated to increase 109.9%. In the past 30 days, earnings estimate for 2021 has been revised upward by 206.3%.

Price & Consensus: JAKK




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Mattel, Inc. (MAT) - free report >>

JAKKS Pacific, Inc. (JAKK) - free report >>

TakeTwo Interactive Software, Inc. (TTWO) - free report >>