We recently upgraded our rating for Hasbro Inc. (HAS) from Underperform to Neutral, primarily due to product diversification and meaningful joint ventures.
Hasbro reported its fourth quarter 2010 earnings of 99 cents per share, which were well ahead of the Zacks Consensus Estimate of 95 cents but below $1.09 per share earned in the year-earlier quarter. The better-than-expected results were driven by tight cost-control initiatives, which more than offset the muted growth in sales.
Hasbro’s net revenue of $1,278.7 million in the quarter was down 7.2% year over year and fell behind the Zacks Consensus Estimate of $1,300.0 million. Foreign exchange fluctuation had an unfavorable impact of $23.5 million.
For full fiscal 2010, earnings per share were $2.74 versus $2.48 in 2009, while revenue declined to $4.0 billion from $4.07 billion in the prior year. Foreign exchange had a $17.7 million negative impact on full-year 2010 revenues. Full-year earnings included a favorable tax adjustment of 15 cents per diluted share and a dilution of 30 cents per share related to the company’s television investments.
Hasbro is operating under a tough environment. The company experienced a dip in total revenue in the fourth quarter of 2010 as demand for toys was below its expectations during the crucial holiday season due to adverse weather conditions and price increases by retailers. This will lead to lower order placement from retailers in the first quarter of 2011 since they already have sufficient inventory on hand after a sluggish holiday period.
Hasbro’s quarterly earnings beat was on the back of its cost cutting initiatives, not on revenue growth. In an environment of increasing input costs, we believe it would be challenging for the company to sustain its earnings momentum. Apart from commodity costs, management also anticipates rise in wages in manufacturing hubs like China. The company recently hiked its dividend, but its closest competitor Mattel Inc. (MAT) also walked the same path.
However, we believe Hasbro’s strong product line-up slated for 2011 and 2012, shift to broadcasting media, strategic association with Discovery, Universal Pictures, Electronic Arts and Mediaset as well as aggressive penetration into emerging markets will augur well for investors. The company’s joint venture with Discovery Communication called ‘HUB’, which was 25–30 cents dilutive to earnings in fiscal 2010, is expected to be accretive in 2011.
Hasbro’s revenue from entertainment and licensing category declined to $136.5 million in the 2010 from $155 million a year ago. This was primarily due to a decrease in movie-related revenues generated by Transformers and G.I. Joe entertainment properties. Accordingly, Hasbro has been trying to come up with a new and improved Transformers brand, which has so long been a profitable for Hasbro, in order spur its sales. In mid-March 2010, Hasbro sealed a deal with Jagex Limited to jointly develop a new online game based on the Transformers brand.
Hasbro management expects 2011 to be Hasbro’s first year in the digital arena as the company brings to market a Transformers massively multiplayer online game in China. Moreover, in partnership with global retailers, Hasbro will have Transformers toys and games, licensed consumer products, and digital games across all platforms in mid-2011.
Hence, based on the expected positive outcome from all the investments, we have upgraded the stock from Underperform to Neutral. Hasbro currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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