JPMorgan Initiates Mattel At Overweight, Hasbro At Neutral

JPMorgan has started coverage of toy makers Mattel, Inc. MAT with Overweight and Hasbro, Inc. HAS with a Neutral rating.

Mattel

Analyst Kevin Milota in a note said, "We are attracted to the MAT investment story, as we believe the investor narrative will soon shift from one that is currently centered on the revenue stabilization efforts undergoing in 2016, to the one that is focused on the company's top-line and operating profit growth prospects in 2017 and 2018."

Milota, who has a price target of $38 on Mattel, believes management has proven its ability to effectively right-size its expense structure through its multi-year cost operational excellence program (and will see $300 million in cumulative cost savings by YE16).

"This, combined with the solid momentum from its core brands (namely Barbie post the brand re-imaging and Wheels, to name a few), combined with a strong multi-year cinematic slate in 2017 and 2018, should help drive an estimated ~20% EPS CAGR from 2015-2018E, comprised of +12% EPS growth in 2016, +26% in 2017 and +14% in 2018," he added.

Milota thinks the longer-term opportunity is 2017 and beyond, when he expects revenues to revert back to mid-single-digit growth, driven by 1) core brand strength momentum; 2) the stabilization of it Monster High product line; 3) increases in entertainment licensing revenue; and 4) growth from emerging markets.

The analyst noted the company ended 2015 with much cleaner U.S. and international retail inventory for all core brands than it had over the last few years.

"With MAT's improved retail inventory position, we believe the company will be able to ship in much closer alignment with POS, which should help the company address product availability issues," Milota said.

Hasbro

Meanwhile, Milota rates Hasbro Neutral mainly on valuation with a price target of $81.

"We believe the company's business model is high-quality, as it maintains a world-class portfolio of brands, proven entertainment licenses, strong and sustainable top-line and margin drivers, and balanced capital return profile," Milota highlighted.

Milota sees healthy and growing top-line contribution from partner brands (28 percent of 2015 revenue) in 2016 and beyond.

"With that said, we believe these attributes are fully encompassed in the stock at current levels (trading at 20.6x, 18.6x and 16.4xour 2016-2018E EPS) versus its long-term one-year forward average of 15.9x," Milota elaborated.

Milota would become more constructive on Hasbro when he sees a marked pullback in its shares.

According to TipRanks, Milota has a success rate of 56 percent, with average return per recommendation of +11.4 percent. He is ranked 636 out of 3,852 analysts.