Never have toys and games been so entertaining for investors.
Since March 15, when the Centers for Disease Control and Prevention said that events of 50 or more people should be postponed for at least two months, demand for leisure-activity products like jigsaw puzzles, knitting gear and Nintendo has driven the biggest eight-week rally for companies keeping so much of the population preoccupied, if not entirely amused, during the coronavirus pandemic.
As dozens of retailers, transportation and energy firms struggle to avoid bankruptcy with businesses collapsing under the weight of social distancing, shares of the five global toy-and-game manufacturers gained 31% since mid-March, beating 68 major industries for the first time since 2007, according to data compiled by Bloomberg.
Back then, rising toy sales were part of the worldwide economic boom, with the International Monetary Fund projecting the 5.2% growth rate to rise in 2008 amid few signs of the looming financial crisis. Video games such as Halo 3, Wii Play and Call of Duty 4 captured new customers on four continents before the Great Recession, beginning in December 2007, deflated the euphoria and put toys in a bear market that didn’t hit bottom until 2015, according to data compiled by Bloomberg
Even after this year’s record rally, toys and games have the cheapest valuation since 2010, based on the forward-looking price-to-earnings ratio, which means that earnings in the months ahead are likely to be greater than every other industry on a relative basis, according to data compiled by Bloomberg. While analysts constantly adjust their recommendations — sales forecasts for S&P 500 companies have been reduced 8.4% so far this year — they are more optimistic about toy-and-game makers than at any point during the past five years.
Hasbro Inc., the Pawtucket, Rhode Island maker of G.I. Joe, Play-Doh, Nerf balls, Scrabble, Monopoly, Trivial Pursuit and trading cards including Magic: The Gathering and Dungeons & Dragons, appreciated 72% over the six weeks starting March 15 as the S&P 500 and the Bloomberg World Index were gaining 21% and 16%, respectively. Not since its initial public offering in 1968 has Hasbro seen such a markup, and analysts say they expect the company’s 2020 revenue to grow 20%, the most since 1999. Hasbro suddenly looks like a unicorn in the consumer discretionary group of companies, whose revenues are projected to rise only 3% this year, according to data compiled by Bloomberg.
Shares of Japan-based Nintendo have a similar halo, increasing 44% in the same six weeks as the Nikkei 225 index advanced 12%. The last time Nintendo came so far so fast was the summer of 2016 when it launched the reality mobile game, Pokemon Go, and this year analysts predict Nintendo’s sales will increase 11%, almost four times the growth for the consumer discretionary group of firms.
As it compiles analyst recommendations, Bloomberg assigns a score of one to five to each company, with five representing the strongest consensus for bullish share performance. The score for toy-and-game makers in the U.S. surged to a record 4.3 this year from 4 in 2015, widening the gap between the industry and the rest of the stock market. The S&P 500 fluctuated between 3.7 and 3.9 during the past five years.
To be sure, the pandemic has created challenges for some of the strongest-performing companies. Nintendo acknowledged that it is struggling to keep up with demand for its best-sellers, Animal Crossing: New Horizons and Nintendo Switch. But this is the kind of problem every company would welcome right now. When Microsoft Corp. reported quarterly earnings on April 29, it said revenues were 4% greater than analyst estimates because its PC games business is getting an extra boost from so many people working from their homes.
Governments across the globe already have made toys and games an essential service as efforts to slow the spread of Covid-19 shuttered most economic activity. Weeks before it eased many restrictions, Italy made sure its stores catering to babies would be open. –Bloomberg
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