Robert Olstein on Hasbro (HAS)
HAS had a history of going after expensive licensing deals and over spending which resulted in excess depreciation and amortization charges and sub-par reported earnings. The widening positive deviation between free cash flow and reported earnings was one of several clues leading us to conclude that an earnings turnaround could be imminent. In the company’s 2000 Annual Report, long time CEO Alan Hassenfeld and COO Alfred Verrecchia indicated that a series of initiatives were being implemented to focus on the core business and reduce costs. We believed that these comments were the key catalyst for our investment in HAS. After reading two years of financial filings, we determined that the company was heading in the right direction for the first time in many years. During the next few years, we dealt with earnings surprises, negative sentiment for the toy industry and the consolidation of distribution channels. Every HAS shareholder letter thereafter increased our conviction in our investment, with comments like “back to basics,” “fixed overhead reductions,” “reduce debt,” “reduce spending,” “tighter controls,” “stock buybacks” and “no longer going to engage in overpaying for toy licenses.” Apathy and disgust have since been replaced by cheers and an approximate doubling of Hasbro’s stock led by an expectation of free cash flow of $1.80 per share in 2007. In addition, the company has utilized its free cash flow over the past five years to eliminate all debt and now has over $1.00 per share of excess cash. We sold some stock at material capital gains as the price moved higher. At the present time, we continue to hold a meaningful position at a current price of about $25.00 a share.