Hasbro Inc. (HAS) is expected to release its third quarter results on Oct 19. The Zacks Consensus Estimate is pegged at 91 cents per share. The company had reported earnings of 89 cents per share in the year-ago period. 

Hasbro’s second quarter results of 26 cents per share were three pennies ahead of the Zacks Consensus Estimate of 23 cents, reflecting strong sales of Transformers and G.I. Joe toys, both tied to blockbuster summer movies. The company also reaped the benefits of its cost curtailment initiatives. 

At the time of the last earnings release, management had stated that the joint venture investment with Discovery Communications will not be as dilutive to 2009 and 2010 earnings as previously forecasted. The company had at that time expected that the dilution to 2009 earnings will be in the range of 15 to 20 cents per share, compared to the previous guidance of 25 to 30 cents per share. 

For 2010, the company expects dilution of 25 to 30 cents per share, versus the previous expectation of 30 to 35 cents per share. Given Hasbro’s strong product line-up and lucrative product associations with popular motion pictures, the company remains well positioned to navigate the current downturn. It is generating strong growth out of popular items such as the Marvel and the Transformers toy lines. 

Strong sales in the recent quarter resulted from growth in Transformers, G.I. Joe, Nerf and Play-Doh, among other product lines. Hasbro has also implemented several cost-saving initiatives and price increases, which should help it mitigate the increases in costs to some extent. Hasbro’s long-term strategy also focuses on extending its brands further into the digital world. 

As part of this strategy, the company entered into a multi-year strategic agreement with Electronic Arts. The agreement provides opportunity to participate in the faster-growing digital gaming/casual entertainment category, a market that is expected to grow to $1 billion by 2011. However, uncertainty regarding consumer spending in this period of weak economic growth remains. 

Customers are reducing their non-essential purchases. The economic slowdown has severely impacted discretionary consumer spending, which has deteriorated sharply in the U.S. and in many other countries around the world. As a result, the balance sheets of toy manufacturers such as Hasbro, Mattel Inc. (MAT) and JAKKS Pacific Inc. (JAKK) have been impacted significantly. 

We note, however, that Hasbro’s financial results are back-end loaded, with nearly two-thirds of annual revenue generated in the second half of the year. Hence, with some early signs of economic recovery, we think that the company should be able to enjoy growth in sales during the holiday season, though such growth would be limited. 

Given its extremely strong financial position, we believe that Hasbro is poised to grow in future. The company has an impressive array of products and is generating strong performance out of popular items such as the Marvel and Transformers toy lines. However, we feel that the most of this potential is currently reflected in the company’s share price. 

Nevertheless, given the high-level of uncertainty regarding consumer spending in the near term, we remain cautious. Hence, we have a Neutral recommendation on the shares of Hasbro.
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