For Subscribers

Get the complete article now!

Two analyst, one expert and top management from six sector firms examine the leisure products & theme parks sector in this special 38-page Leisure Products & Theme Parks issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info523.htm.

TWST: What did the fourth quarter look like for Hasbro (NYSE:HAS) and Mattel (NYSE:MAT)? That’s usually the make-or-break quarter, isn’t it?

Mr. Gianoukos: It is. You earn about 50% of your earnings in the fourth quarter. They had a decent fourth quarter, given what is going on in the economy. Toys tend to be fairly recession-resistant. Sales were not great, but they were not terrible, and both these companies are also in the middle of turnarounds, which helped them meet expectations. Mattel is further along in its turnaround than Hasbro is, and as a result has more predictable earnings, but at the same time, at this price, we don’t see a reason to enter Mattel now. When it dips — and these stocks do tend to dip in the back half of the year as holiday fears surface — you get better entry points. But over the longer run, $21 for Mattel is fair value, and Hasbro is probably $2 away from fair value.

TWST: Is Barbie still the dominant product for Mattel?

Mr. Gianoukos: Barbie is about 30% of Mattel’s revenue and 40% of its operating income. It’s the best toy ever built, but that said, it’s hard to build on such a big success. We estimate that the average girl in the US between the ages of three and 10 spends slightly over $160 per year on Barbie merchandise, which may be difficult to top. The traditional toy business for the most part is mature, and we continue to look for 2%-4% top-line growth from both of these companies. Despite this, their earnings should outgrow the market over the next couple of years because they’re turning their businesses around. However, over the long run this is a mature business, and any revenue growth above our estimate is likely to come from acquisitions.

TWST: How much competition do traditional toys get from electronic toys and computer games?

Mr. Gianoukos: Some, mainly because kids are maturing quicker and as a result leaving traditional toys behind at an earlier age. As an example, girls used to play with Barbie until they were age 12 and now it’s around eight to 10. Additionally, the growth of PCs, the Internet and video games is also having an impact. As a result of kids growing up faster and the fact that the toy companies’ target demographic is shrinking, we think the industry may be in a tough spot, especially once the turnarounds are complete. That’s why we don’t expect a lot of top-line growth and are only willing to apply p/e multiples of 17-19 times for Mattel and Hasbro. We think it’s hard to put a growth multiple on a toy stock, and at this point they’re not really value stocks either.

TWST: Overall, Dean, what would your message be to investors who are wondering whether leisure products and leisure time stocks are a place to put money this year?

Mr. Gianoukos: We would say you need to watch the stocks closely. They tend to be very volatile and, to a large degree, are trading stocks. So we try to pick the right entry points by sticking with historical valuations. There is a lot of money to be made in this sector because the stocks tend to move around so much, but at the same time, if you come in at the high end, there’s money to be lost as well.

This special issue includes:

1) Leisure Activity & Recreational Products - In an in-depth (2,900 words) Analyst Interview, Timothy A. Conder, Vice President at.G. Edwards & Sons, examines the outlook for the sector including and shares specific stock recommendations.

2) Leisure Activity & Recreational Products - In an in-depth (3,700 words) Analyst Interview, Dean Gianoukos, Analyst that follows the leisure industry at J.P.Morgan Chase, examines the outlook for the sector including and shares specific stock recommendations.

3) Outlook for Them Parks - In an in-depth (4,500 words) Expert Interview, Dennis L. Speigel, President of International Theme Park Services, Inc., examines the outlook for the sector including and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of six sector firms examine the outlook for their firm and the sector.