In this article, let's take a look at Hasbro Inc. (HAS, Financial), a $6.87 billion market cap company, which is a company with a broad portfolio of toys, games and entertainment offerings includes brands such as Transformers, Playskool, Monopoly and My Little Pony.
Business Model
The toy industry is characterized as competitive. Hasbro is one of the largest companies operating with global brands such as: Transformers, My Little Pony, and Nerf. It has an exposure to the digital and entertainment segment in a different way than its rivals.
Deals with Backflip Studios and Activision made Hasbro to have an attractive presence in the digital arena. Further, the company owns a 50% interest in a joint venture with Discovery Communications, Inc. that operates The Hub that brings Hasbro Studios productions to the TV, help to have a major range of possible customers. Other key drivers are brand loyalty and new streams of revenue from its licensing businesses.
International Growth
International operations contributed more than a half of 2013 net revenues. Hasbro plans to focus on emerging markets, which provides upside potential in the future. It has expanded its operations in countries such as Brazil, China, Czech Republic, Colombia, Korea, Peru, Romania and Russia. Also, acquisitions of strategic players could accelerate growth.
Strong cash
Management is embarking on a cost savings plan to save $100 million annually. This can be achieved by reducing the work force and improving processes. Moreover, it plans to focus on organic growth and returning capital to shareholders: dividends plus share buybacks (the company repurchased $103 million of shares in 2013). The company has a strong balance sheet and good cash that allows the company to hike its dividend payout of $1.72 per share, reflecting a dividend yield of 3.1%, higher than the industry average of 1.94% and the S&P 500 median of 2%. Dividends have been paid since 1981 and in the last five years they were more than doubled.
Industry characteristic
Another characteristic of the toy industry is that children seem to mature earlier and move away from traditional toys and games at a younger age. Hasbro faces competition from other companies, such as makers of video games and consumer electronic products.
Revenues, margins and profitability
Looking at profitability, revenue growth by 8.21% led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.26 vs $0.28). During the past fiscal year, the company reported lower earnings of $2.17 versus $2.54 in the prior year. This year, Wall Street expects an improvement in earnings ($3.23 versus $2.17).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HAS | Hasbro | 22.17 |
| PII | Polaris Industries Inc | 57.55 |
| ACAT | Arctic Cat Inc | 20.30 |
| BC | Brunswick Corp | 66.12 |
| Ă‚ | Industry Median | 7.07 |
The company has a current ROE of 22.17% which is higher than the industry median and the one exhibit by Arctic Cat Inc. (ACAT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Polaris (PII, Financial) and Brunswick (BC, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 22.0x, trading at a discount compared to an average of 28.6x for the industry. To use another metric, its price-to-book ratio of 4.8x indicates a premium versus the industry average of 2.56x while the price-to-sales ratio of 1.7x is above the industry average of 1.67x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $21,674, which represents a 16.7% compound annual growth rate (CAGR).
Final comment
As outlined in the article, Hasbro's leader position in entertainment with The Hub network, as well as international expansion is behind the potential stock upside. Also, generating strong cash continually to maximize shareholder´s value makes me feel bullish on this stock. It also faces a number of risks, and we think that of mature children may affect the future trend of the business, but near-term catalysts are stronger.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and John Keeley (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
