Corporate Responsibility Magazine recently released its 100 Best Corporate Citizens list. This year marks the 14th time this list has been published. We, at the Socially Responsible Investing website consider CR’s list, itself, amongst the best of SRI/CRI lists.
CR documents 298 data points of disclosure and performance along broad categories including the environment, climate change, employees, human rights, governance, finance and philanthropy. CR itself has made its measurement process and methodology more transparent over the years.
Some interesting notes about the list:
- The list is drawn from the Russell 1000 Index so the companies are not all large multinationals. However, and unfortunately, many of the top rated companies are still larger than what would be represented in the Russell 2000 index. We believe that smaller companies tend to be more authentically supportive of CSR programs rather than larger firms that are increasingly setting-up CSR departments as just another cost-center .
- Movement of companies in/out of the list is quite large with 26 companies joining the list in 2013 (that’s a 25% turnover rate). Do companies really change that much (people don’t !) ?
- Nearly one dozen companies have appeared on the list every year since 2007.
- 70% of the Top 10 are consumer-oriented companies.
- Two of the Top 10 are toy companies, with Mattel Inc. coming in at 2nd and Hasbro, 7th.
There are 7 main categories as mentioned above. Within these 7, there are 14 subcategories (usually about 2/category). For example, for Employee Relations, there are the subcategories of Diversity disclosure, and Employee Benefits disclosure as well Diversity performance. The big theme throughout the list methodology is disclosure. We would like to see more focus on performance, though this admittedly requires a great deal more work.
So what’s so special about toy companies?
Both Mattel and Hasbro were on the Top 10. Further, both companies are featured on other CSR lists. For example, Mattel (#96) and Hasbro (#92) are on Fortune’s 100 Best Companies to Work for 2013. Well, not only are toy companies consumer facing organizations, but toy-users (i.e., children) are our most precious ones. So, it follows that the toy firms would be more socially responsible (e.g., safety first) than say, an oil pipe manufacturer.
Industry Structure of the U.S. Toy Industry:
- Mature Industry
- Demographics (i.e, the birth rate) highly influential on revenue growth
- Growth is in the very low-single digits
- Industry Revenue (U.S. market) ~ $21Bn (Refer to blue section of chart).
- High competition from lots of smaller differentiated players (and low entry barriers).
- The top players are not large enough to influence the market and raise profit margins.
- Price competition given that the main distributors are discount chains such as Wal-Mart (High bargaining power of customers).
- The improving U.S. economy should improve birth rates somewhat, in turn increasing industry revenues.
- Significant imports (80%+) from China, and dependence on plastics as a raw material.
|Source: NPD Group|
Investing in Hasbro (HAS) and Mattel (MAT):
Both companies have had decent, but not spectacular financial and stock market performance, with the larger company Mattel besting Hasbro on both counts. Over the last year, Hasbro’s shares have risen 23%, while Mattel’s have risen nearly 37% (12mos period ended 6/23/13). Both companies dominate a slow-growing industry sector whose markets, in turn, are dominated by three larger retailers, Wal-Mart, Toys-R-US and Target which distributed nearly 40% of the industry’s product revenues.
Hasbro (HAS) is known for its Monopoly games as well as the Transformers, Nerfs, and PlaySchool. After a weak 4Q’12, financial performance improved during 1Q’13, which was highlighted by strong (+26%) games growth with overall sales growing 2% (so little market share gains as industry sales growth is in the low-single-digits). However, shares appear fairly valued given low earnings growth. Analysts expect HAS shares’ 2013 P/E to be about 13x which is somewhat high in our view considering the company’s sub-P/E earnings growth (i.e, PEG is over 1x) and 2013 operating margins are 1%-plus below its 2010 peak of nearly 15%. Note that Hasbro is also undergoing another restructuring which is likely to increase earnings volatility. However, Hasbro’s long-term (one year +) prospects should improve as the company is expected to see higher margins related to its ongoing product rationalization, brand building and focus on licensing. Some of the more interesting CSR actions the company does are giving its first year employees 3 weeks vacation, a subsidized gym, compressed workweek, telecommuting and a job sharing program. Hasbro was also ranked #1 on Climate Counts’ scorecard for the toy industry. And as of this writing, HAS received an Environmental Award from the U.S. EPA.
Mattel (MAT) appears to be the better of the two companies – at least for now. Other than the financial crisis period of 2008, MAT shares have risen steadily and more so compared to HAS. The company is well liked by employees with many staying at the company over 15 years. An outstanding 63% of employees are women (Source: Fortune). Before we discuss financials, it is worth noting that the company provides sabbaticals to its employees as well as:
- an onsite gym, including a subsidized membership fee
- compressed workweek
- and offers domestic benefits for same-sex couples.
Mattel’s financials are good. In fact, Mattel is currently at its highest operating profit margins in years. Mattel’s P/E is approximately 19x and 13-14x on a forward basis. Like Hasbro, this forward P/E is also above its growth rate implying a PEG that is above parity. However, note that Mattel’s operating profit margins (see below) and earnings growth are higher than Hasbro’s (see comparison table on bottom of page).
Odds are higher that consumer-facing companies will make it to the CR 100 Best Corporate Citizens list. Above were highlighted two toy companies that ranked highly on CR’s list as well as others such as Fortune’s Best Companies to Work For.
Disclosure: The author has no shares in HAS or MAT.