Toys R Us' pending liquidation of its U.S. business is a clear overhang for the entire toy sector, and the official announcement of store closures is a negative for near-term earnings, a KeyBanc Capital Markets report said. But shares of Hasbro, Inc. HAS and Mattel, Inc. MAT are oversold, which presents a "compelling" long-term buying opportunity for investors, according to the sell-side firm.
The Analyst
KeyBanc's Brett Andress maintains an Overweight rating on Hasbro's stock with an unchanged $110 price target. KeyBanc maintains a Sector Weight rating on Mattel's stock with no assigned price target.
The Thesis
The official announcement of Toys R Us' store closures in the U.S. could be seen as an event that "clears the decks from a sentiment/headline" point of view, Andress said in a Wednesday note. (See the analyst's track record here.)
The store closures are akin to "ripping the Band-Aid off of an otherwise drawn-out process" and should be finalized by the early spring or ahead of the holiday season at the very latest, the analyst said. The toy sector should have sufficient time to adjust for the all-important holiday period, he said.
The Math
Toys R Us accounts for approximately 9 percent of Hasbro's fiscal 2017 sales and 8 percent of Mattel's sales, Andress said. It's reasonable to assume 30 percent of Toys R Us' lost sales will be absorbed by other retailers, who will be more than eager to gain the extra business, he said.
Here's a rundown of KeyBanc's estimate changes for both Hasbro and Mattel.
Hasbro:
- Fiscal 2018 EPS estimate from $5.40 to $5.15.
- Fiscal 2018 sales estimate from 3.8 percent to 1 percent.
- Fiscal 2019 EPS estimate from $5.80 to $5.65.
- Fiscal 2019 sales estimate from 3.6 percent to 3.5 percent.
Mattel:
- Fiscal 2018 EPS estimate from a loss of 20 cents to a loss of 40 cents.
- Fiscal 2018 sales estimate from negative 1.7 percent to negative 5.1 percent.
- Fiscal 2018 EBITDA estimate from $385 million to $295 million.
- Fiscal 2019 EPS estimate from positive 30 cents to positive 20 cents.
- Fiscal 2019 sales estimate from positive 0.6 percent to negative 0.5 percent
Hasbro Over Mattel
Hasbro's stock has fallen 7 percent since mid-September, while Mattel's stock is down 14 percent, the analyst said. While Toys R Us' closures are now more than adequately factored into both stocks at current prices, Hasbro represents a better investment due to a "catalyst-rich" 2019, Andress said. Mattel's risk profile has now elevated into an "already fragile turnaround," he said.
Price Action
Shares of Hasbro were trading lower by 1.5 percent at the time of publication Thursday, while Mattel's stock was trading lower by 0.16 percent.
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