Barbie, G.I. Joe Makers Go to Hollywood

NEW YORK ( TheStreet) -- Forget the year of the rabbit -- 2011 might turn out to be the year of the Potato Head.

This week Hasbro ( HAS), the second-largest toy company in the world, and No. 1 Mattel ( MAT) are expected to post a decline in first-quarter earnings. But Hasbro is gearing up for a busy summer of blockbuster movie tie-ins that could lift profit by 20% this year.

Investors will size up the toy rivals this week, with Hasbro reporting quarterly results on Thursday and Mattel on Friday. The strengthening economy and ancillary businesses such as movie tie-ins and TV programs could bring surprises for investors this year. And these revenue sources may prove especially lucrative for Hasbro, which is best known for its Mr. Potato Head doll, G.I. Joe action figures and iconic board games.

The toy business isn't mere child's play. According to NPD Group, U.S. toy industry sales were $22 billion last year, up 2% from 2009, even as consumer spending waned.

However, toy makers have had to work harder to entice thrifty customers in recent years. While Mattel's sales increased 8% to $5.86 billion in 2010, Hasbro's revenue slipped to $4 billion from $4.07 billion. The prospect of $4-a-gallon gas means kids will likely lose out in the toy department.

Toy makers' shares have yet to show sustained outperformance. Mattel's are up 2.3% this year and 16% over the past 12 months, while Hasbro's are flat this year and up 23% over the past year. The Standard & Poor's 500 Index has risen 5.9% this year and 13% over the past 12 months.

Mattel and Hasbro own many of the world's most beloved toy brands. Pawtucket, R.I.-based Hasbro owns the rights to the Monopoly game, which is in its 76th year, and G.I. Joe, who first fired a shot in 1964, continues to bring in cash. Mattel's "Barbie," who will turn 52 this year and hasn't changed a bit since her launch in 1959, still generates big revenue for the El Segundo, Calif., company.

To boost toy sales in a sluggish economy, the companies have turned to licensing deals with Hollywood studios to promote their brands. The "Transformers" movies, for example, are drawing a new generation of children to Hasbro's robot cars. Wedbush analysts say "Cars 2," scheduled for release in June, will generate $500 million in revenue for Mattel in 2011, on top of any revenue tied to the upcoming "Green Lantern" film.

"It's 'Cars 2' and 'Green Lantern,' and getting this brand out there, so it's not just one toy or game," said Jefferies ( JEF) analyst Per Ostlund. That link represents a steady revenue stream for Hasbro and Mattel that's not going to get beat by a generic toy brand. "They're just not replicable," he said of their brand strength.

Hasbro has a busy summer coming up with toys planned for the upcoming "Thor" film, set to hit theaters next month, followed by "Transformers: Dark of the Moon" and "Captain America" in July. "Transformers: Revenge of the Fallen" fueled $592 million in sales of Transformers goods in 2009.

In October, Hasbro introduced a children's television network called The Hub through a joint venture with Discovery Communications ( DISCA) that led to the rebranding of the Discovery Kids network. Its shows include "Transformers Prime" and "G.I. Joe Renegades." The company says the channel reaches 61 million U.S. households.

The first quarter is the quietest of the year for toy makers as the holiday season makes up about 40% of revenue.

Hasbro is expected to report earnings of 17 cents per share in its first quarter, down from 40 cents per share last year. For fiscal 2011, analysts estimate that Hasbro will earn $3.10 per share, up 20% from 2011, and that will grow 15% to $3.55 per share in 2012, according to Standard & Poor's.

Mattel is expected to report earnings of $18.6 million, or 6 cents per share, compared with $24.8 million, or 7 cents, during the year-earlier quarter. For fiscal 2011, analysts estimate Mattel will earn $2.04, up 13% from 2010, according to S&P. Analysts expect per-share profit to grow 9% to $2.23 in 2012.

Investors considering a bet on the toy industry should keep in mind that Hasbro has surpassed analysts' profit expectations for the past seven quarters, according to Bloomberg data. Mattel, in contrast, exceeded estimates in the fourth quarter, but fell short in the previous two quarters.

Hasbro shares have also returned 20% annually, on average, during the past five years, beating Mattel's 12% gain and the 4.8% increase of the S&P 500 Consumer Discretionary Index.

More than two-thirds of analysts recommend buying shares of either company, according to S&P. But the research firm says Hasbro shares could rise 9.5% to $50 during the next 12 months, while Mattel's might climb only 6.6% to $27.

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