US toy companies will take a big hit if China slaps tariffs on the sector

• US toy manufacturers are subject to huge earnings risks if China slaps tariffs on the sector, according to a research report.
• Earnings at Hasbro could fall up to 20% while Mattel's losses would push further into the red.
• Watch Hasbro and Mattel trade live.

The US toy industry will be subject to a significant hit to earnings if China places tariffs on the sector. While tariffs on toys have so far been excluded from the US-China trade war, this could change if the dispute is not resolved quickly.

GI Joe-maker Hasbro could face an earnings hit of up to 20% if tariffs are implemented, according to a research report from Jeffries analyst Stephanie Wissink. She estimates Hasbro earnings per share will fall from $4.51 to $3.57 if tariffs of 25% are put in place. Hasbro is up 25% this year, trading near $103.65 a share.

Barbie maker Mattel, which has already been posting steep losses, would fall deeper into the red. Wissink predicts losses per share could nearly triple to $1.10 from $0.44. The stock has had a volatile 2018, down 34% from its February peak, and is currently trading at $10.78.

Both companies heavily rely on China for their manufacturing, with up to 60% of production based in the country. For its part, China has notably avoided placing tariffs on the sector to reduce the risk of the companies shifting long-term production plans to other countries. The companies have also lobbied to avoid tariffs as shifts to digital entertainment have weighed on the sector.

"Industry lobbyists have successfully protected toys from China import tariffs thus far but in an 'all or nothing' political approach, the lobbying effort to protect has shifted to an agenda to minimize the impact," wrote Wissink.

President Donald Trump's recent threats of tariffs on Mexican imports will not have a major impact on the sector, according to UBS analyst Arpine Kocharyan. She predicts the maximum impact on Mattel's earnings will be $0.03 a share hit while Hasbro will not be impacted given its lack of manufacturing in the country. Kocharyan did, however, note the risk of Chinese tariffs.

"While toy makers can over time reengineer product to take some of the cost out to keep price point optimal for the consumer, it could be challenging to readjust manufacturing immediately (or shift production geographically), in case tariffs were to be implemented," she wrote.