Investors Are Learning This Sector Isn't Just Fun and Games

If investors have learned anything over the past decade, it's that the business world can sometimes be ruthless and unforgiving. For the toys and games sector over the past few months, we've learned that not only is it not a Barbie world, but Hello Kitty can mean goodbye profits!

With all major toy companies having reported their holiday results, I can undoubtedly say that they were nothing short of dismal.

JAKKS Pacific (NAS: JAKK) was the latest toy company to report its quarterly results. On Tuesday, the company posted a loss of $0.72 on sales of $141.1 million -- a clean $0.10 worse than analysts had predicted, but slightly higher on sales. The primary culprit of the worsening losses has been excessive discounting on JAKKS' part. To make matters worse, in September the company received an offer to be taken private at $20 per share, a bid management quickly called "inadequate." The stock is now trading roughly 25% below that offer price. If you'd like to know what color a Smurf turns if you choke it, go ask a JAKKS Pacific shareholder.

Weakness in the toys sector isn't confined to JAKKS, even though it has the worst fundamentals of the bunch. Hasbro (NYS: HAS) and Mattel (NYS: MAT) both reported disappointing holiday results as well.

For Hasbro, "do not pass Go, do not collect $200" took the form of a revenue miss in the fourth quarter. The maker of Monopoly and Nerf products did grow revenue by 7%, but still ceded market share to Mattel during the quarter. As for Mattel, higher raw material, labor, and transportation costs (the triple whammy) zapped its holiday profits.

Is there any growth left in the toys and games sector? I think so, but you have to look with a discerning eye.

LeapFrog Enterprises (NYS: LF) is a company that can actually tout solid gains in the face of sectorwide weakness. Its LeapPad, a tablet-like learning device for children that the company recently introduced for $100, is selling better than anyone had envisioned. LeapFrog's outlook topped Wall Street's expectations and at just 12 times forward earnings, the stock is still cheap by most standards.

I happen to also still like Hasbro despite its sales miss. The company's dividend has grown tenfold since early 2004 and it has grown EPS in 11 consecutive years. Although sales growth might not be extravagant, Hasbro is obviously doing something right.

Finding success in the toys and games sector is no longer as easy as connecting the dots, but that doesn't mean there aren't values still floating around in the sector.

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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He always lands on St. James Place. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Mattel. Motley Fool newsletter services recommend have recommended by shares of Hasbro and Mattel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never goes to jail.

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