Toy companies are consistent cash flow generators. The 4 companies we’re looking at today - Mattel (MAT, Financial), Hasbro (HAS, Financial), Jakks Pacific (JAKK, Financial), and RC2 (RCRC, Financial) - have a combined free cash flow record over the last 10 years of 37 positive years and 3 negative years.
In other words: 93% of the time these companies were throwing off cash to make acquisitions, buy back stock, or pay dividends.
These kinds of businesses make you money - if you buy them at the right price.
Are Today’s Prices the Right Prices?
One way to value a stock is to compare it to a bond. A bond pays a set amount of cash each year. A stock doesn’t. That makes it harder to value.
There’s no way to fix that problem. But there is a way to make it less of a problem: Take the company’s average free cash flow for the last 10 years and divide it by the number of shares out now.
I did this for each of the 4 stocks. The result is a rough guess of what each stock’s normal earnings are:
10 Year Average Free Cash Flow
Hasbro: $2.47/share
RC2: $1.60/share
Jakks: $1.41/share
Mattel: $1.14/share
I divided these numbers by yesterday’s stock prices. Here’s what I got:
10 Year Average Free Cash Flow Yields
Jakks: 12.98%
RC2: 11.27%
Hasbro: 7.90%
Mattel: 5.74%
All 4 stocks yield more than AAA corporate bonds (5.21%). Since we’re taking 10 year averages and all these businesses had positive free cash flow in at least 4 out of every 5 years comparing these numbers with AAA bond yields is a good place to start.
If investors were willing to pay as much per dollar of 10 year average free cash flow as they do for AAA bond interest the stocks would sell at these prices:
Intrinsic Value
Hasbro: $47.41
RC2: $30.71
Jakks: $27.06
Mattel: $21.88
But they don’t. As you can see here:
Stock Price vs. Intrinsic Value
Jakks: $10.86 vs. $27.06
RC2: $14.38 vs. $30.71
Mattel: $19.85 vs. $21.88
Hasbro: $31.28 vs. $47.41
How Accurate are These Intrinsic Value Estimates?
Not very.
They’re a starting point. When investors look at bonds they start with the yield and then look at the risks the company faces and the earnings and assets that protect the bond.
Since lots of stocks don’t pay dividends investors don’t start with yield when they look at stocks. Instead they just look at last year’s earnings or next year’s estimates.
Taking the last 10 years of free cash flow is a better place to start.
When you do that you see the price differences between stocks are so big it’s not enough just to know what the best business in the bunch is.
Maybe you think Mattel is the best toy company in the world. Maybe it is. But with a 5.74% yield on the last 10 years of free cash flow Mattel is priced like a AAA bond (5.21%).
Jakks and RC2 aren’t as good businesses as Mattel. No one doubts that. Maybe they have more growth ahead of them. Maybe not. But their brands aren’t as good. Their margins aren’t as good. And they don’t have the same clout with retailers.
Fine. But they’re also selling at much higher yields - 12.98% for Jakks and 11.27% for RC2.
Stock investors who compare Jakks and RC2 to Mattel and Hasbro are like bond investors who compare AAA bonds with junk bonds.
That’s hard. Whatever advantages AAA bonds have over junk bonds may be more than made up for by the higher yields.
Mattel has to be a lot better than Jakks to justify its higher price. And Jakks has to be a lot worse than Mattel to justify its lower price.
In some ways it is. Mattel’s 10 year average free cash flow is dragged down by 2 bad years. If we ignore those 2 years and just look at the last 8 years Mattel’s average free cash flow yield jumps to 7.66% - about the same as Hasbro’s (7.90%).
Which is the right number?
There is no one right number. But by looking at these businesses over longer periods we get a better idea of what they’re really worth.
I’ll write about one of these stocks each day for the next 4 days and then we’ll answer the question of which you should buy.
For now I want to make 2 points:
1. Toy stocks are cheap.
2. And there are big prices differences between them.
In other words: 93% of the time these companies were throwing off cash to make acquisitions, buy back stock, or pay dividends.
These kinds of businesses make you money - if you buy them at the right price.
Are Today’s Prices the Right Prices?
One way to value a stock is to compare it to a bond. A bond pays a set amount of cash each year. A stock doesn’t. That makes it harder to value.
There’s no way to fix that problem. But there is a way to make it less of a problem: Take the company’s average free cash flow for the last 10 years and divide it by the number of shares out now.
I did this for each of the 4 stocks. The result is a rough guess of what each stock’s normal earnings are:
10 Year Average Free Cash Flow
Hasbro: $2.47/share
RC2: $1.60/share
Jakks: $1.41/share
Mattel: $1.14/share
I divided these numbers by yesterday’s stock prices. Here’s what I got:
10 Year Average Free Cash Flow Yields
Jakks: 12.98%
RC2: 11.27%
Hasbro: 7.90%
Mattel: 5.74%
All 4 stocks yield more than AAA corporate bonds (5.21%). Since we’re taking 10 year averages and all these businesses had positive free cash flow in at least 4 out of every 5 years comparing these numbers with AAA bond yields is a good place to start.
If investors were willing to pay as much per dollar of 10 year average free cash flow as they do for AAA bond interest the stocks would sell at these prices:
Intrinsic Value
Hasbro: $47.41
RC2: $30.71
Jakks: $27.06
Mattel: $21.88
But they don’t. As you can see here:
Stock Price vs. Intrinsic Value
Jakks: $10.86 vs. $27.06
RC2: $14.38 vs. $30.71
Mattel: $19.85 vs. $21.88
Hasbro: $31.28 vs. $47.41
How Accurate are These Intrinsic Value Estimates?
Not very.
They’re a starting point. When investors look at bonds they start with the yield and then look at the risks the company faces and the earnings and assets that protect the bond.
Since lots of stocks don’t pay dividends investors don’t start with yield when they look at stocks. Instead they just look at last year’s earnings or next year’s estimates.
Taking the last 10 years of free cash flow is a better place to start.
When you do that you see the price differences between stocks are so big it’s not enough just to know what the best business in the bunch is.
Maybe you think Mattel is the best toy company in the world. Maybe it is. But with a 5.74% yield on the last 10 years of free cash flow Mattel is priced like a AAA bond (5.21%).
Jakks and RC2 aren’t as good businesses as Mattel. No one doubts that. Maybe they have more growth ahead of them. Maybe not. But their brands aren’t as good. Their margins aren’t as good. And they don’t have the same clout with retailers.
Fine. But they’re also selling at much higher yields - 12.98% for Jakks and 11.27% for RC2.
Stock investors who compare Jakks and RC2 to Mattel and Hasbro are like bond investors who compare AAA bonds with junk bonds.
That’s hard. Whatever advantages AAA bonds have over junk bonds may be more than made up for by the higher yields.
Mattel has to be a lot better than Jakks to justify its higher price. And Jakks has to be a lot worse than Mattel to justify its lower price.
In some ways it is. Mattel’s 10 year average free cash flow is dragged down by 2 bad years. If we ignore those 2 years and just look at the last 8 years Mattel’s average free cash flow yield jumps to 7.66% - about the same as Hasbro’s (7.90%).
Which is the right number?
There is no one right number. But by looking at these businesses over longer periods we get a better idea of what they’re really worth.
I’ll write about one of these stocks each day for the next 4 days and then we’ll answer the question of which you should buy.
For now I want to make 2 points:
1. Toy stocks are cheap.
2. And there are big prices differences between them.
