Saturday, January 7, 2012

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.

7 comments:

  1. HAS does look interesting but needs to go lower yet to be a good value. They are doing well overall - management looks like they are getting it right as the Piotroski Score of 8 says they are a pretty solid company. The debt does have an effect on the Altman Z-Score - it is only 1.97 so there is reason for caution here also.

    The price/cash flow ratios are both high and the price is still headed down quite firmly. When it starts heading up instead of down will be a good time to look at it again.

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  2. Thanks for your comment and the additional stats, mbkelly.

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  3. Deedubs--You have picked a good dividend growth stock with 8 years of increasing dividends. The 5 yr dividend growth rate is 22.3%. The yield is 3.8%. My minimum yield is 4%. The 11.48 p/e is justified by the yield + dividend growth rate. The 13.54% projected earnings per share growth rate for next year multiplied by the projected earnings of $3.27 more than justifies the current price of $31.90. I would buy it at the 4% yield point ($30). The price chart is in a downward track, but projected earnings are on an uptrend for the next 5 years of 12.7%.

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  4. Thanks for your comment and the price justification, tweedn (Norman).

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  5. deedubs,

    Good stuff. I appreciate your look at this company. I don't view it as a value trap currently. I think it's not going to grow substantially from year to year, but the decent yield and low valuation gives you a little margin of safety. It has an economic moat to be sure, due to the brand name appeal of its products, but I'm not quite sure how wide it would be. The debt is the one red flag, in my opinion.

    Overall with the valuation, yield and size of the company I might make a run at initiating a position with this company keeping it as a small position. I'd like some smaller companies in my portfolio.

    I currently have some capital to work with, and this is one of about 10 companies I'm looking at buying right now.

    I think management would be prudent to slow down that DGR to about 10% and use the excess capital to pay down debt. We'll see.

    Best wishes!

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  6. Thanks for your comments, DM. My view is similar in many ways to yours.

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  7. Coincidentally, an article providing a quantitative analysis of HAS was posted on Seeking Alpha today:

    http://seekingalpha.com/article/318105-hasbro-undervalued-income-pick

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