Analyst Downgrades Leading Toy Stocks -- Bah, Humbug!


In the timeless holiday classic Rudolph the Red-Nosed Reindeer, forgotten playthings are eventually rescued from the Island of Misfit Toys.

This Christmas, we may be seeing companies banished to the island of misfit toymakers.

Needham analyst Sean McGowan downgraded shares of Mattel (MAT), Hasbro (HAS), and JAKKS Pacific (JAKK) on Wednesday.

Obviously, an analyst doesn't single out practically an entire industry -- in this case moving them all from "buy" to "hold" -- unless there's a larger trend working against the universe of toymakers. McGowan believes that weakness in Europe and softness closer to home as consumers become distracted during the presidential election will slow demand for toys through at least early November.

It may seem nearsighted to sell playthings makers short just ahead of the critical holiday shopping season that kicks in later in November, but it's hard to disagree with the general sentiment.

Do you plan on spending more on traditional toys this season? And if not toys, then what?

The Changing Face of Play

It may be a sign of the times, but Toys R Us is introducing its own tablet. Tabeo will set parents back $149, but the tablet does come preloaded with 50 apps including educational titles, e-books, and many of the popular smartphone games. It also has dual cameras, and parents can easily set parental controls to keep online surfing in check.

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The leading standalone toy retailer wouldn't be introducing a tablet on its own if it didn't think that this was the future of toddler gaming. After all, a parent spending $149 on a Tabeo isn't likely to buy too many other toys. It wouldn't be promoting the portable device -- knowing that it would be a conflict of interest with its other toy lines -- if the trend wasn't real.

Mattel, Hasbro, and JAKKS Pacific will naturally suffer if children move away from action figures and board games. However, these are the same kids that see parents tapping away on their smartphones and fancier tablets.

Besides, most of the traditional board games are now available as apps.

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Ho Ho No

Things don't have to end badly for the traditional toy companies, but it's going to be challenging.

Analysts see all three downgraded companies growing their earnings this year and again in 2013, but how has that worked out so far? JAKKS Pacific has missed Wall Street's profit targets in three of the past four quarters. Hasbro and Mattel also came up short during the first quarter, and analysts actually see Hasbro posting a slight decline in sales this year.

Hasbro and Mattel in particular have diversified toy lines, but it may not be enough this season. When Rudolph flies over them later this year, let's hope they remember to flag the red-nosed reindeer down.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Hasbro. Motley Fool newsletter services have recommended buying shares of Hasbro and Mattel. Motley Fool newsletter services have recommended creating a bear put spread position in Mattel.

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