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Table of Contents
Global Thesis............................................................................5
The US Toy Industry Is Unattractive .......................................8
The US Toy Industry Is Fragmented into Many Segments..........................................9
Key Growth Drivers for Toy Companies...................................................................10
Improving Demographics Should Drive Rebounding Growth...................................12
Toy Industry Concerns...............................................................................................15
The Near-Term US Economic Outlook Is Bleak .......................................................19
Low Historical US Toy Industry Correlation with Economic Trends, But We Believe
this Recession Will Be Different ...............................................................................20
International Toy Markets Are More Attractive ........................................................22
Mattel and Hasbro Have Room for Market Share Expansion....................................26
Toy Industry Seasonality Is Pronounced....................................................................27
Toy Stock Performance Is Seasonal: December Wall of Worry Typically Dissipates
in Q1 ..........................................................................................................................28
Entertainment Tie-Ins Drive Stock Performance before Major Movie Releases.......30
Mattel, Inc................................................................................34
Key Investment Points ...........................................................34
Investment Risks....................................................................35
Company Description ............................................................38
Company Background and History............................................................................38
Mattel’s High Leverage to International Markets Is a Key
Long-Term Positive ................................................................40
Review of Mattel’s Healthy International Business...................................................42
Mattel’s Brand Portfolio .........................................................46
Mattel Girls & Boys Brands (56% of 2007 gross sales) ............................................47
Fisher-Price (37% of 2007 gross sales)......................................................................57
American Girl (7% of 2007 sales) .............................................................................60
Other (0.3% of 2007 sales) ........................................................................................61
Mattel's Bratz Legal Victory Is a Significant Positive ...............................................61
Acquisitions Are Not a Key Focus........................................62
Concentrated But Declining Retailer Leverage ...................63
Solid Cash Flow . . .................................................................64
. . . and a Strong Balance Sheet . . .............................................................................65
. . . Have Led to Increasing Cash to Shareholders .....................................................67
Pension Plan Funding Not a Significant Risk Factor.................................................68
Manufacturing Weighted to China ........................................70
Product Recalls Not a Major Concern Going Forward ..............................................74
Lower Mattel Royalties versus Hasbro ......................................................................75
Experienced Management Team...........................................76
Quality of the Board Is Solid .....................................................................................77
Earnings Outlook....................................................................78
Q408 and 2009 Consensus Estimates Are Too High .................................................78
Our Q408 Outlook Is Below Consensus ....................................................................79
Our 2009 Outlook Is Below Consensus.....................................................................79
Currency Is Switching from a Tailwind to a Headwind.............................................81
Mattel Has a Weak EPS Track Record ......................................................................82
Mattel’s Valuation Looks Fair................................................84
Risks to Our Rating and Price Target ...................................87
Hasbro, Inc..............................................................................92
Key Investment Points ...........................................................92
Investment Risks....................................................................93
Company Description ............................................................96
Company Background and History............................................................................96
Hasbro’s Brand Portfolio Is Varied .......................................98
Games and Puzzles (34% of 2007 sales)....................................................................99
Boys Toys (27% of 2007 sales) ...............................................................................100
Girls Toys (18% of 2007 sales)................................................................................103
Preschool Toys (11% of 2007 sales)........................................................................104
Tweens Toys (7% of 2007 sales) .............................................................................105
Other (3% of 2007 sales) .........................................................................................106
EA Partnership Offers a High-Margin Revenue Opportunity..................................106
Hasbro’s Domestic Market Share Gains Have Driven Growth
...............................................................................................108
Solid International Growth and Further Expansion Potential
...............................................................................................109
Key Points from the November 12th Analyst Meeting ......110
Hasbro Aggressively Focuses on Licensing Opportunities......................................112
Acquisitions Are Not a Focus .............................................113
Hasbro’s Retailer Base Is Concentrated ............................114
Strong Balance Sheet . . . ....................................................115
. . . and Solid Cash Flow . . . ....................................................................................116
. . . Drive a Shareholder-Friendly Focus ..................................................................117
Pension Plan Funding Not a Significant Risk Factor...............................................118
Cost Pressures Should Continue in 2009 ..........................120
Strong Hasbro Management Team .....................................124
Quality of the Board Is Solid ...................................................................................124
Earnings Outlook..................................................................125
Q408 and 2009 Consensus Estimates Are Too High ...............................................125
Our Q408 Outlook Is Below Consensus ..................................................................126
Our 2009 Outlook Is Below Consensus...................................................................126
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