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3 Toys & Games Stocks to Watch Despite Industry Challenges

The Zacks Toys - Games – Hobbies industry has been negatively impacted by high costs, COVID-related retail closures, shipment disruption and stiff competition. However, robust demand for smart toys, STEM toys (Science, Technology, Engineering and Math), sports toys, fashion dolls and accessories bode well. The industry participants have been undertaking efforts on the digital front and focusing on better execution of marketing and promotional initiatives to drive growth. The industry players, including JAKKS Pacific, Inc. JAKK, Mattel, Inc. MAT and Hasbro, Inc. HAS, are likely to gain from the aforementioned trends.

Industry Description

The Zacks Toys - Games – Hobbies industry comprises companies that design, manufacture and sell various games and toys. While traditional toymakers primarily focus on marketing and selling action figures, accessories, dolls, youth electronics and arts and crafts, other industry players develop and market content and services on video game consoles, personal computers and mobile. Some of the industry participants offer video game platforms, playing cards, Karuta and other products along with handheld and home console hardware systems and related software. A few companies also develop and operate retail and online military simulation games and provide multiplayer and single-player games.

3 Trends Shaping the Future of Zacks Toys - Games - Hobbies Industry

Shipment Disruption & High Costs Remain Concerns: The coronavirus pandemic continues to hurt shipments, brick-and-mortar sales and delivery of content. Temporary store closures, product shortages, lower retail inventories and supply chain disruption have been hurting the industry. The companies have been resorting to product launches and shifting toward more technology-driven toys to boost sales, which might drive profits in the long haul. However, costs related to the initiatives may prove detrimental to the industry in the near term. Maintaining liquidity has become an arduous task for a number of industry participants in the current scenario. Most companies are cutting pay and furloughing employees.

Pandemic Driving Demand for Toys: Although coronavirus-induced shutdowns have hurt most industries, toymakers have been gaining from the same. 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 the toy-buying spree continues across the country, online sales of board games and building sets have been on the rise. Per the NPD Group, U.S. toys sales increased 16% and 13% in 2020 and 2021, respectively. During 2021, both unit sales and average selling price (ASP) rose 8% and 4%, respectively. According to the NPD Group, the three-year compound annual growth rate for the period between 2018 and 2021 was 8%, primarily driven by ASP growth of 8%. Most toy companies are focused on bolstering online business. The industry is anticipated to perform robustly in 2022.

STEM Toys Gaining Popularity: Amid declining sales of traditional toys, robust demand for STEM toys has been quite a relief. The Asia Pacific region has emerged as a major growth driver for STEM toys. Countries like India, Malaysia, Singapore and Thailand are witnessing rising demand for STEM toys. Parents are focusing more on educational toys to teach their children during the pandemic. Per a Technavio report, educational toys are likely to grow to $28.4 billion during 2021-2025, witnessing a CAGR of more than 14%. The APAC region is likely to contribute growth of 36%. The industry players have been capitalizing on new distribution methods, development of digital-play components, exploration of ventures with other industries and focusing on international expansion to drive growth. The industry has enormous growth potential in China and Brazil as both countries have a massive population of kids aged zero to 14 years.

Zacks Industry Rank Indicates Dismal 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 dismal near-term prospects.

The Zacks Toys – Games – Hobbies industry currently carries a Zacks Industry Rank #211, which places it in the bottom 17% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Since Jan 31, 2022, the industry’s earnings estimates for the current year have moved south by 10.2%.

Before we present a few stocks that investors can take a look at, let’s analyze the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500

The Zacks Toys – Games – Hobbies industry has underperformed the S&P 500 Index in the past year. The industry has decreased 17.7% over this period compared with the S&P 500’s decline of 1.1%. Over the same time period, the sector has fallen 36.6%.

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 20.88X, higher than the S&P 500’s 17.82X but lower than the sector’s 18.07X.

Over the last five years, the industry has traded as high as 31.37X and as low as 18.83X, with the median being at 26.37X, as the chart shows.

3 Zacks Toys Stocks to Keep an Eye On

JAKKS Pacific: Headquartered in Santa Monica, CA, JAKKS Pacific is a multi-brand company that designs and markets a broad range of toys and consumer products. The company has been benefiting from strategic acquisitions, a solid international footprint, and a focus on innovation and collaborations with popular brands and movie franchises.

Shares of this Zacks Rank #2 (Buy) company have appreciated 52.4% in the past year. Its earnings for 2022 are anticipated to increase 13.1%. In the past 30 days, the earnings estimate for 2022 has been revised upward by 16.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: JAKK

Mattel: Headquartered in El Segundo, CA, Mattel is the world’s largest manufacturer of toys. A robust Barbie brand and Hot Wheels sales are driving its performance. Given a strong product lineup, which includes core brands, licensed brands and lucrative product associations, the company remains well-poised for growth. Barbie brand continues to instill investor confidence with solid performance. In the first quarter, the Barbie brand’s worldwide gross billings witnessed an improvement of 8% on a reported basis and 12% at cc.

Shares of this Zacks Rank #3 (Hold) company have gained 19.7% in the past year against the industry’s decline of 17.7%. Its 2022 earnings are anticipated to increase 13.9%. In the past 90 days, the earnings estimates for 2022 have been revised upward by 1.4%.

Price & Consensus: MAT

Hasbro: Headquartered in Pawtucket, RI, Hasbro is engaged in the design, manufacture and marketing of games and toys. Hasbro has been witnessing strong gaming demand amid the coronavirus crisis. The company has a top gaming portfolio, and it is refining gaming experiences across a multitude of platforms like face-to-face gaming, tabletop gaming and digital gaming experiences on mobile. Given a strong product lineup and a greater focus on entertainment-backed products, Hasbro's Entertainment and Licensing segment is poised for growth.

Shares of this Zacks Rank #3 company have declined 9.9% in the past year. The company’s sales for 2022 are anticipated to increase 3.1%. In the past 30 days, earnings estimates for 2022 have been revised upward by 3%.

Price & Consensus: HAS

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