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 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 is quite a breather. 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 in terms of revenues, suggesting a sharp increase from $21,991.48 million in 2015. Rising demand for architectural, visual programming and eco-friendly toys is driving the educational toys market.
- The Toys “R” Us bankruptcy in September 2017 left toymakers like Hasbro (NASDAQ:HAS), Inc. (HAS), Mattel (NASDAQ:MAT), Inc. (MAT) and JAKKS Pacific (JAKK) in a spot. 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 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. However, strategic initiatives have helped the industry recover to an extent from the Toys “R” US liquidation. In third-quarter 2019, the U.S. Toys industry returned to growth. Per The NPD Group, the industry’s sales in the quarter increased 3% year over year to $3.69 billion. The growth is likely to continue in fourth-quarter 2019.
- 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 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.
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 #77, which places it in the top 30% of 254 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 Oct 31, 2019, the industry’s earnings estimates for the current year have moved 5.1% up.
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.
The industry has gained 4.5% over this period compared with the sector’s increase of 14.1% and the S&P 500 Index’s rise of 17%.
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 25.94X, higher than the S&P 500’s 17.9X and the sector’s 19.49X.
Over the last five years, the industry has traded as high as 30.46X, as low as 17.12X and median of 22.88X, as the chart shows.
Bottom Line
Expansion in emerging market 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 run.
Here are a 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.
JAKKS Pacific sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year loss has narrowed from $1.59 to $1.47 over the past month. The company’s earnings surpassed the consensus estimate in the preceding quarter.
Price & Consensus: JAKK
Activision Blizzard (NASDAQ:ATVI), Inc. (ATVI): This Santa Monica, CA-based company has a Zacks Rank #2. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year growth of 14.3%. The company has an estimated long-term earnings growth rate of 11%. The company has an average positive earnings surprise of 24.5% for the trailing four quarters.
Price & Consensus: ATVI
Investors may hold on to the following 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, has an estimated long-term earnings growth rate of 8.9%. The company delivered average positive earnings surprise of 193% in the trailing four quarters.
Price & Consensus: TTWO
Mattel has an estimated long-term earnings growth rate of 9%. The company’s earnings beat estimates in the trailing four quarters, delivering an average positive earnings surprise of 102.8%. For the current year, Mattel’s earnings are expected to increase 60.5% year over year.
Price & Consensus:MAT
Take-Two Interactive Software, Inc. (TTWO): Free Stock Analysis Report
Mattel, Inc. (MAT): Free Stock Analysis Report
JAKKS Pacific, Inc. (JAKK): Free Stock Analysis Report
Hasbro, Inc. (HAS): Free Stock Analysis Report
Activision Blizzard, Inc (ATVI): Free Stock Analysis Report
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