We maintain our Neutral recommendation on toys and games maker Hasbro Inc. (HAS). The company’s second-quarter earnings were well ahead of the Zacks Consensus Estimate, primarily driven by tight cost-control initiatives, which more than offset the muted sales performance.
We believe Hasbro’s ability to deliver growth in both revenue and earnings per share depend upon its broad-based strength across its core brand product portfolio and strong execution globally. Its strong product line-up, strategic association with Discovery, Universal Pictures and Electronic Arts, and aggressive tapping of the Latin American market holds promise for investors. Additionally, the company’s expense-management efforts bode well. Hasbro’s forward earnings will likely benefit from accretion of share buyback.
Although we believe Hasbro is well positioned to improve its fundamentals with decent long-term sales growth prospects, tough comparisons in 2010 may be a drag on the stock. Although two movies are slated for release in 2010, we think it would be difficult for Hasbro to outperform its achievement in 2009, which included the releases of Transformers 2, GI Joe, and Wolverine.
Moreover, we remain cautious on the stock due to increasing input costs, currency fluctuation, and the execution risk around the joint venture with Discovery Communication and its dilutive effect on near-term earnings. Hasbro’s joint venture with Discovery Communication is expected to dilute earnings by $0.25 to $0.30 in fiscal 2010, owing to costs incurred for re-branding and re-launching the network along with marketing and advisory fees. The company does not expect the initiatives to be accretive before fiscal 2011.
Hasbro’s primary competitor in the toy and games market is Mattel Inc. (MAT), which could pose a threat to Hasbro’s market share for some of its strong girl brands (My Little Pony, FurReal Friends, Littlest pet shop) as Mattel has historically been the dominant player in the girls market with its renowned “Barbie” brand.
