If you are looking to diversify your portfolio by investing in the toy industry, you should consider Mattel (Nasdaq:MAT) and, depending on market conditions, LeapFrog (NYSE:LF).
The Industry
The toy industry is highly correlated with market trends. Mattel has a beta of 0.92 and Leap Frog's beta is 2.14. Thus, with an increasing market return, both companies may follow the trend, and Leap Frog could even outperform the market. With the outlook of the market getting better, I think it is worthwhile to take a position in this sensitive industry.

In manufacturing, economies of scale is always an important factor. Mattel is the biggest company in the toy industry, with a market cap of 10.54 billion. The company's net income in 2011 was $769 million. Mattel's gross margin of 50.20% is higher than that of its peers like Hasbro (Nasdaq:HAS) and JAKK (Nasdaq:JAKK). Hasbro, Mattel's main competitor, has a gross margin of 48.4% while JAKK's is 31.29%. Mattel's operating margin of 17% is also higher than that of Hasbro and JAKK. Hasbro's operating margin is almost 3% lower than Mattel and JAKK's is less than 3%. Looking at P/E ratios, Mattel's P/E is in line with that of the industry's average of 14 while JAKK's P/E is above 55.

See: Analyzing Operating Margins.

LeapFrog is a small cap and its operating margin of 5.28% is much less than Mattel and Hasbro because of the lack of economies of scale. However, LeapFrog has shown significant growth in revenue during these years. From 2009 to 2010, the company's net income improved greatly from a loss of $2.7 million to a $4.9 million profit, and its net income increased by more than 300% to $19.9 million in 2011. LeapFrog has a P/E ratio of 27.5, well above the industry average. With a positive market outlook and a huge potential, the company's stock is worth buying.

Cash and Dividends over the Years
Mattel's current dividend yield is 3.9%, which is pretty decent. Although LeapFrog does not offer dividends yet, it's still a growing company and has only been public for 10 years. I think for a growing company like Leap Frog, it's more meaningful to look at its cash position. LeapFrog's cash and cash equivalents have grown from $19.5 million in 2010 to $71.9 million in 2011, which could indicate an availability of extra cash to invest in new projects. Moreover, LeapFrog's inventory reduction from $47.5 million in 2010 to $34.3 million in 2011 might be due to a current increase in demand.

See: Measuring Company Efficiency.

Technical Analysis
Mattel's RSI (14 days) value is at 32 and LeapFrog's RSI is 54. An RSI value below 70 is an indication that the stock is not overbought. Mattel's RSI, which is almost at the 30 benchmark, is an indication that the stock is likely to be undervalued. In addition, both companies have shown a clear upward trend since 2008 with no clear resistance.

See: An Introduction to the Relative Strength Index.

Bottom Line
Based on current market conditions, Mattel would be a great company to invest in, and now is a good time to buy. LeapFrog might also be worth investing in, but it may be a bit risky given its high beta. Investors' decision to buy LeapFrog should depend on their level of risk adverseness and confidence in the market's recovery.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Alexandra Yan did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!