Near-Term Prospects Look Bright for Toys & Games Industry

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:

  • Although coronavirus-induced shutdowns have hurt most industries, toys makers have been benefiting from the pandemic. 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. Hasbro, Inc. (HAS) is witnessing strong gaming demand amid this crisis scenario. The company has a strong gaming portfolio, and it is refining gaming experiences across a multitude of platforms like face-to-face gaming, off-the-board gaming and digital gaming experiences in mobile.
  • However, the coronavirus pandemic will continue to hurt shipments, brick-and-mortar sales, and delivery of content in order to meet demand. Further, temporary store closures, product shortages, lower retail inventories, supply chain disruption and live-action production shutdowns are likely to impact performance. The industry is also likely to bear the brunt of 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. Per The NPD Group, European countries witnessed decline in toys sales due to store closures.
  • Amid declining sales of traditional toys, robust demand for educational toys has been quite a relief. Moreover, 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. Notably, 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 #93, which places it in the top 37% 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.

Before we present a few stocks that investors can take a look at, 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 surged 33% over this period against the sector’s decline of 0.6%. Meanwhile, the S&P 500 Index rallied 10.7% in the same timeframe.

                               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 31.3X, higher than the S&P 500’s 22.69X and the sector’s 33.82X.

Over the last five years, the industry has traded as high as 31.3X and as low as 19.51X, with the median being at 25.48X, 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 in the long haul. However, production and supply disruption of toys from China due to the coronavirus outbreak and dismal brick-and-mortar sales remain near-term concerns.

Here area couple of stocks with a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mattel (MAT) is the world’s largest manufacturer of toys. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 17 cents in the past 30 days. Moreover, the company’s current-year earnings are likely to witness growth of 42.3%.

                                  Price & Consensus: MAT

Take-Two Interactive Software, Inc. (TTWO): The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 4 cents. The company has an estimated long-term earnings growth rate of 10%.

                              Price & Consensus: TTWO

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

Electronic Arts Inc. (EA), a leading developer, marketer, publisher and distributor of interactive games (video game software and content), has an estimated long-term earnings growth rate of 7.3%. In the past 30 days, earnings estimate for fiscal 2021 has been revised upward by 5 cents.

                                Price & Consensus: EA

Hasbro has an estimated long-term earnings growth rate of 13.7%. For 2020, the company’s earnings are expected to decline 16.2% year over year. However, for 2021, the company’s earnings estimate is likely to witness a gain of 25.2%.

                             Price & Consensus: HAS

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