Stock Thoughts: HAS

I have been watching Hasbro (HAS) lately and I wanted to share my thoughts about it. Hasbro is involved in designing, manufacturing, and marketing toys and games. Some of its well-known brands include Playskool, Sesame Street, Dora the Explorer (my 2-year-old cousin is a big fan), and G. I. Joe in the toy category, and Monopoly, Cranium, Scrabble, and Trivial Pursuit in the game category. There is a good chance you have played with toys and games made by Hasbro during your lifetime -- I know I have.

HAS closed at $31.90 on January 6, almost at its 52-week low ($31.36) and 34% below its 52-week high ($48.43). This raises the question: Is HAS an undervalued, high-quality stock that has been unfairly beaten down lately or are there fundamental problems that make it a value trap?

In an attempt to answer this question, I tried to find a reason for the almost year-long price decline. For the first 3 quarters of 2011, Hasbro reported earnings that were below the consensus estimates of analysts, so that was likely a contributing factor. EPS was down in Q1 2011 relative to Q1 2010, but up in Q2 and Q3 2011 relative to Q2 and Q3 2010. This suggests some earnings growth, but I think it is partly an illusion caused by share buybacks. In May 2011, Hasbro authorized up to $500 million in share buybacks and in the first 3 quarters of 2011 they bought back 9.4 million shares at a cost of $386.7 million, which by my calculation works out to about a 6.9% reduction in total number of shares outstanding. I don't think share buybacks can completely explain the EPS growth in Q2 and Q3 2011, but they do diminish it. However, at least the company is buying back shares at the right time, when the stock price is depressed.

Revenues have been a bit of a mixed bag in 2011, with an increase in the Boys product category, no change in the Preschool category, and decreases in the Girls and Games/Puzzles categories. Revenue has decreased in the U.S. and Canada but increased internationally, although much of the increase appears to be due to the Boys category. Entertainment and licensing revenues increased, in large part due to Transformers movie tie-ins.

Looking back a few years provides some informative data. Cash flow has increased consistently over the past several years, although revenue was relatively flat from 2008 to 2010. A troublesome sign is that long-term debt doubled from $710 million in 2008 to $1.4 billion in 2010. Such a rapid increase in debt is concerning.

HAS currently has a P/E (ttm) of 11.5 and P/S of 1.0. Its dividend yield is 3.76% with a payout ratio of 43%. Its dividend has been increased for 8 consecutive years and the most recent increase was a substantial 20%, announced in February 2011.

The large dividend increase in early 2011 and the use of a large amount of money for share buybacks throughout last year suggest to me that management thinks business is doing okay (if not, then one would think that they would be using their money differently; e.g., paying down debt). However, the mixed revenue growth and the rapid increase in debt seem problematic. Given the ongoing uncertainty about overall economic growth, I also have to wonder how well a toy-and-game company, which is considered consumer discretionary, can do in the near future.

Based on everything above, I am on the fence, seeing a mix of positives and negatives. If you have any thoughts about HAS I am interested to read them.