Why Investors May Be Wrong in the Battle of the Toymakers

Year to date, the market clearly has a favored toymaker. The spread between performance in Hasbro, Inc. HAS and Mattel, Inc. MAT is 72 percent, with the former gaining 45 percent and the latter losing 27 percent. Yet a new research report from Oppenheimer analyst Sean McGowan questions whether that performance mix will continue.

This is a classic case of expectations driving performance. While Oppenheimer agreed that Hasbro is performing well compared with challenges at Mattel, McGowan prefers investing in Mattel given that upside in Hasbro is "baked into [the] valuation." Conversely, at Mattel, there is "little risk of negative surprise."

In fact, McGowan argued that the improvements at Mattel are even being "masked" by some of the negative attention. There are "early signs of moderation in revenue declines," led by Fisher-Price, Hot Wheels and American Girl. That should lead the company to resume growth in profits next year and revenue and profit growth in 2017. Further, Mattel's strong cash flows are supportive of the dividend, which currently offers a yield of 6.75 percent.

Hasbro, which only yields 2.3 percent, has "momentum" from a "well-conceived strategy." But that has been reflected in recent price gains – which account for gains of more than 56 percent in the past year. At a valuation of 19x 2016 EPS expectations, however, McGowan said the firm is "skeptical of additional price appreciation."

McGowan has a Outperform rating and $28 price target on Mattel. On Hasbro, the analyst initiated coverage at Perform without a defined price target.