Solid Demand For Educational Toys To Drive Toys & Games Industry

The Zacks Toys - Games – Hobbies industry comprises companies that design, manufacture and sell various games and toys. While traditional toymakers primarily focus on marketing and selling action figures, accessories, dolls, youth electronics, and arts and crafts, a few companies also develop and market content as well as services on video game consoles, personal computers and mobile.

Let’s take a look at the industry’s three major themes:

• Amid the decline in sales of traditional toys, robust demand for educational toys comes as a ray of hope for the industry. Per Market Study Report, the educational toys market is likely to witness 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, a sharp increase from $21,991.48 million in 2015. Rise in demand for architectural, visual programming and eco-friendly toys is driving growth of the educational toys market.
  
• The Toys “R” Us bankruptcy in September 2017 had left toymakers like Hasbro (NASDAQ:HAS), Inc. (HAS), Mattel (NASDAQ:MAT), Inc. (MAT) and JAKKS Pacific (JAKK) in a mess. Adding to the woes, Toys “R” US liquidated its U.S. operations last year that resulted in a tectonic shift in the retail landscape for toys. All these companies earned the majority of their revenues from sales to Toys “R” Us. Dissolution of such a big retailer affected sales of every industry player. Further, per The NPD Group, U.S. retail sales of toys generated $21.6 billion in 2018, down 2% from 2017. Moreover, Innovation is the key to growth for the toy industry. Making toys that interest children and help them develop at the same time is a challenge for toymakers. Intense competition from a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices is a pressing concern.
  
• In order to fight the sales slump owing to the liquidation of Toys "R" Us, 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 both the countries have a huge 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 14 years. Meanwhile, China has 236 million kids below 14 years. Emerging markets offer greater opportunities for revenue growth than developed markets. Though traditional toy makers are struggling at the moment, video game developers like Activision Blizzard (NASDAQ:ATVI), Inc. (ATVI), Electronic Arts Inc. (NASDAQ:EA) (EA) and Glu Mobile Inc. (GLUU) are gaining from the trend reversal.

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 #30, which places it in the top 12% of 256 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.

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 Lags Sector & S&P 500

The Zacks Toys – Games – Hobbies industry has lagged the broader Zacks Consumer Discretionary Sector as well as the S&P 500 Index over the past year.

One Year Price Performance

The industry has declined 31% over this period against the sector’s increase of 1.2% and S&P 500 Index’s rise of 6.1%.

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 25.97X, higher than the S&P 500’s 17.38X and the sector’s 19.39X.

Over the last five years, the industry has traded as high as 30.46X, as low as 16.07X and median of 22.68X, as the chart shows.

Bottom Line

Toys "R" Us liquidation will continue to cast a shadow on the performance of industry players in the coming quarters. However, expansion in emerging market and growth in demand for education toys bode well for the industry.

Below we have discussed one stock with a favorable Zacks Rank and positive earnings estimate revisions.

Hasbro: The company is the world’s largest manufacturer of toys. Currently, the company sports a Zacks Rank #1 (Strong Buy). Its earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, with the average positive surprise being 98.3%. Earnings estimates for 2019 have witnessed upward revisions of 21 cents in the past 90 days. Earnings for 2019 are likely to witness growth of 17.7%.

Price and Consensus: HAS

Investors may hold on to the following three stocks for the time being, which currently carry a Zacks Rank #3 (Hold).

Take-Two (NASDAQ:TTWO) Interactive Software, Inc. (TTWO), a leading developer and publisher of video games and peripherals, carries a Zacks Rank #3. The company has estimated long-term earnings growth rate of 11.2%. The company delivered average positive earnings surprise of 25.3% in the trailing four quarters.

Price and Consensus: TTWO

Mattel: The leading toymaker, is a Zacks Ranked #3 stock. The company has estimated long-term earnings growth rate of 9.3%. The company’s earnings beat estimates in three of the past four quarters, delivering average positive earnings surprise of 23.8%. For the current year, Mattel’s earnings are expected to increase 49.1% year over year.

Price and Consensus: MAT

Electronic Arts: The company is a leading developer, marketer, publisher and distributor of interactive games (video game software and content). The company has an impressive long-term earnings growth rate of 16.5%. Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average being 113.9%.

Price and Consensus: EA

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