By Paul R. La Monica

It might be time for parents to stock up on Barbies, Hot Wheels, and Play-Doh -- and for investors to stock up on shares of the companies that make them.

The U.S.-China trade war is here.

The world's two biggest economies are at odds, with President Donald Trump already imposing additional 10% tariffs on all Chinese goods within his first two weeks in office. China has already responded with retaliatory tariffs on U.S. oil, coal, and other imports. It's bad news for anyone looking to spend more on toys. But it shouldn't be a problem for investors in toy makers Mattel and Hasbro.

Shares of Barbie and Fisher-Price maker Mattel have soared nearly 25% so far this, compared with a 4% gain for the S&P 500. Rival Hasbro -- which owns popular toy brands like Transformers, Nerf, Dungeons & Dragons, and Play-Doh -- has stretched 8 % higher.

Smaller toy makers, such as JAKKS Pacific and collectible figurine maker Funko, have seen stock rallies this year, too.

Why are toy stock investors shrugging off Trump's tariffs? While China is a major manufacturer of toys, Mattel and Hasbro companies have lessened their reliance on Chinese manufacturers in recent years, giving the duo more of a buffer from tariffs. (Parents' wallets, however, should still get dented if others in the toy industry are forced to boost prices.)

For Mattel, China accounts for less than 40% of global production of its toys, compared with about 80% for the rest of the industry, management said during the company's Feb. 4 earnings call. Chinese production also accounts for about 40% of Hasbro's toys, but the company has maintained it hopes to get that figure down to 20% over the next few years.

Hasbro, also has fewer concerns about tariffs than Mattel because of its "sizable gaming business," according to UBS analyst Arpine Kocharyan. In addition to Dungeons & Dragons, Hasbro also owns the Magic: The Gathering role-playing game franchise. Both games have increasingly gone online, but also feature playing cards that aren't made in China.

A 10% tariff on Chinese goods is "very manageable" for both Mattel and Hasbro, who should have a cost/price advantage over competitors, Jim Chartier, an analyst with Monness, Crespi, Hardt & Co., said in an email to Barron's.

Investors should also remember that this isn't the toy industry's first tariff rodeo. Mattel and Hasbro are more prepared for the threat of levies and tough talk during Trump's second term.

"The toy companies are much better positioned than they were during the first Trump administration regarding exposure to China," Kylie Cohu, an analyst with Jefferies, wrote in an email to Barron's.

However, this doesn't mean either company can rule out price increases entirely.

Mattel CFO Anthony DiSilvestro acknowledged they remain a possibility if further tariffs on China -- as well as Mexico, another toy manufacturing partner for the company -- go into effect. But Mattel could adjust its supply chains and coordinate with retailers "to achieve the right balance," he added.

Perhaps even more important is what these two companies have going for them when looking beyond tariffs.

For starters, Hasbro and Mattel are both expected to report steady earnings growth this year -- thanks more to rising sales rather than higher operating profit margins, according to Cohu. To translate: Demand for toys is boosting profits more than cost-cutting.

Mattel's recent fourth-quarter earnings were better than expected, and its outlook for this year is upbeat, too. Mattel expects fiscal 2025 sales to increase 2% to 3% from a year ago. Davidson & Co. analyst Linda Bolton Weiser boosted her 2025 earnings per share estimate for Mattel by 11% after the latest results, citing strong demand for the company's Hot Wheels toy cars.

Such optimistic guidance amid trade tensions were a pleasant surprise for UBS's Kocharyan, who noted that "tariff risk has been a meaningful overhang for the toy sector."

Hasbro reports earnings on Thursday. Although analysts are expecting a decline in earning and revenue for the fourth quarter, Wall Street is forecasting nearly 13% earnings growth for all of 2025 and 4% sales growth annually.

Both companies should also benefit from a busier slate of movie releases this year, after actor and writer strikes in 2023 led to a slower calendar last year. Mattel and Hasbro each has a licensing agreement to make toys for key Disney franchises -- including Marvel and Star Wars for Hasbro and Disney Princesses for Mattel. Live action versions of "Snow White" and "Lilo & Stitch" are due out in 2025, as well as "Thunderbolts" and "Fantastic Four: First Steps" for Marvel.

All of this has Wall Street excited. The consensus price target for Mattel stock is more than 15% above its current level, according to FactSet, while Hasbro analysts predict gains of more than 25% for the stock.

The key for the industry, though, is that trade tensions with China don't escalate further.

"Investors in Hasbro and Mattel should not worry about a 10% tariff on sourcing from China as both companies can employ strategies to mitigate the impact," Monness, Crespi, Hardt & Co.'s. Chartier added. "However, it would become a bigger concern if the incremental tariffs go above 25%."

But investors might already be pricing in a worst-case scenario when it comes to tariffs.

Mattel and Hasbro stock look fairly attractive, valued at about 13 and 14 times earnings estimates for fiscal 2025, respectively. Both are trading below their five-year average multiples and at a larger-than-normal discount to the S&P 500.

That means any positive surprises on the negotiation front between the U.S. and China could lead to even further gains for the toy stocks. Consider it Christmas in February for Hasbro and Mattel investors.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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February 18, 2025 13:12 ET (18:12 GMT)

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