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Hasbro Continues its Profitable Streak

April 24, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers
Hasbro, Inc. (HAS) has been on the radar of many investment gurus like Paul Tudor Jones (Trades, Portfolio) and John Hussman (Trades, Portfolio) for some time now, given its position as the second largest toy manufacturer in the industry, only outranked by Mattel, Inc. (MAT). But the company’s first quarter earnings report showed that it could possibly outperform industry giant and rival Mattel in terms of growth, as Europe and Latin America registered 8% and 17% growth respectively, while Mattel saw declines in the same regions. Furthermore, quarterly earnings were driven mainly by the girls’ category, which sported a 20% increase in demand for My Little Pony, Equestria Girls, and Nerf Rebelle products. So, with profitability on the right track, what can investors expect from this industry player in the long term?

Licensing agreements and emerging market growth

Although Hasbro’s quarterly earnings were boosted by the girls’ toy category, while the boys’ segment showed merely 2% growth, fiscal 2014 should balance out the segments when the Transformers and Spiderman films launch in the second quarter. Owning a licensing agreement for Marvel has also helped boost results in the domestic market and Canada, as the recent launch of “Captain America: The Winter Soldier” was a box office hit, thereby boosting sales of the Captain America action figure in the U.S. Moreover, the firm has been clever to focus its energy some years ago on the digital and entertainment business, giving it a competitive advantage over industry rivals. In fact, while Hasbro’s relationship with Activision Blizzard, Inc. (ATVI) has been significant in positioning the firm in the digital market, its joint venture with Discovery Communications Inc. (DISCA) – The Hub – has helped generate very strong brand loyalty, as well as new revenue streams.

Furthermore, management has made a point of increasing its stewardship of shareholders via a dividend yield of nearly 3%, as well as its share buyback program that the firm executed on track, repurchasing 1.9 million shares throughout fiscal 2013. And while the dividend rate is solid (having doubled over the past five years), the company’s cost saving initiative launched in 2013 will allow it to save $100 million annually by cutting down the work force and improving efficiency. Looking forward, investors can expect Hasbro to continue Q1’s growth streak, with sales increasing 6% for 2014, due to stable demand in the domestic market and strong growth in the international segment, especially in emerging markets. Also, considering that five of the company’s seven franchise brands sported a 15% growth rate, increasing quarterly revenue by 2%, it’s likely that Q2 will show even stronger results, due to the Easter holiday.

Positives outranking negatives

Although Hasbro’s earnings per share have lost strength since 2012, decreasing from $2.82 to a current $2.2, most of the company’s metrics have improved significantly. Q1 showed a substantial increase in gross margins, rising 90 basis points to 61.9%, due to improved inventory management and a more diversified and favourable revenue mix. The shift towards the entertainment segment will also contribute to increasing operating margins, which should jump from the current 11.44% to more than 15% over the next decade.

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Moreover, the company’s historically strong returns on capital (averaged 20% of the past five years) should remain solid and well above the average cost of capital of 8.8% in the long term. I also feel bullish about Hasbro’s debt reduction, which decreased significantly from $1.4 billion to $960 million over the past year. Overall, considering the stock’s trading price of 25.2x trailing earnings compared to the industry average of 21.4x, I believe this investment is definitely worthwhile for a long term profit gain.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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