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Published: May 7, 2010
For many years, Hasbro (NYSE: HAS) and
Mattel (NYSE: MAT) turned in lackluster annual results, as sales
and profits grew at a snail's pace. Both of these toymakers only
recently learned how to boost sales, cut costs and reduce the
share count, but only one also took a page from Marvel --
purveyor of comic books, toys and mega-blockbuster movies based
on its vast stable of characters. If there was any doubt about
it, these moves have created an impressive path toward ongoing
profit growth for Hasbro.
A quick glance at Hasbro's 2010 forecasts gives the impression
of a company that has squeezed out all remaining profit growth.
Analysts actually expect per share profits to slightly drop this
year, but that obscures a far brighter picture. Hasbro's
transformation began -- and will continue -- with the
Transformers movies, the first of which was a blockbuster hit in
2007. The movie featured Hasbro's own characters, and offered a
clear departure of producing toys tied to characters that are
owned by other entertainment firms.
Sales of Transformer toys spiked from $100 million to $500
million that year, and actually stayed at that elevated level
the next year, even though there wasn't a fresh movie to support
it. Last year's release of Transformers: Revenge of the Fallen
kept toy sales at that high pace, and management intends to keep
the ball rolling with a third Transformers movie set for release
next year.
The impact of Transformers has been profound. From 2001 to 2006,
annual sales were stuck in the $3 billion range. But in the past
three years, they leapt to the $4 billion mark (aided as well by
other positive sales trends for other toys). Management has
articulated plans to get sales to the $5 billion mark. For
starters, Hasbro is expected to participate in a host of new
feature films that tie into other toys and games such as
Battleship, Stretch Armstrong, Monopoly, Oujia, Clue and a GI
Joe sequel. Most of those films, assuming they receive the green
light, will be released in 2012 and 2013.
Hasbro has also invested $300 million in television programming,
inking a 50/50 joint venture with Discovery Communications (Nasdaq:
DISCA) to launch the Discovery Kids network. The network trails
Nickelodeon, the Disney channel and the Cartoon Network, but the
gap is closing fast -- viewership is up roughly +200% during the
last decade. The TV investment has been a drag on profits but
should soon start to bolster them. Discovery Kids' will soon be
re-launched as "The Hub," and will feature hundreds of hours of
new programming. Notably, analysts appear to have held off
reflecting the steady improvements in Discovery Kids' viewership
and profitability
Hasbro's steadily rising sales have been
accompanied by expanding profit margins. Operating margins were
stuck in the 10.0% range in the middle of the last decade, but
steadily climbed to 14.5% in 2009. As the TV network starts to
generate cash, and as toy sales from those movie tie-ins start
to build, operating margins could approach 16% or even 17% in
the next few years.
That improving profit trend led management to embark on plans to
issue debt simply to buy back stock. The $625 million plan,
announced last month, could reduce the share count -15% by the
end of next year. There is a precedent: buybacks reduced shares
outstanding by an average of -10% in 2006, 2007 and 2008. Put
another way, shares outstanding, which stood at 197 million in
2006, could fall below 140 million by the end of next year. Here
again, analyst models do not yet factor in a further sharp drop
in the share count.
Increasingly, it looks as if Hasbro has a host of positives that
are not yet incorporated into analysts' forecasts. For example,
analysts think the company will earn a bit more than $3 a share
next year, but barring an economic swoon -- $3.50 is looking
increasingly likely. And as those new movies roll in during 2012
and 2013, per share profits could handily top the $4 mark. As
investors look out the horizon and award the stock an earnings
multiple in line with the broader market, shares could trade up
to 15 times that $4 a share projection, or $60 -- a nice +50%
gain from current levels.
Equally important, it's hard to envision a scenario where sales
or the stock would sharply slump form current levels. After all,
toy sales remained flat, even as demand for many other
discretionary items fell sharply in 2009. This is a stock with
low risk and potentially high reward. You don't find that often.
-- David Sterman
Contributor
StreetAuthority |
