Are Hasbro Shares a Sell After the Earnings Falter?

Hasbro (NASDAQ:HAS) shares are now trading around $38.39 after the toy maker released its third quarter earnings. Is HAS a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The familiar maker of children’s toys and games reported a 3.6 percent drop in third-quarter earnings on Monday as quarterly profits came in at $164.9 million, or $1.24 per share. Those numbers are down from last year’s same-quarter profits of $171 million, or $1.27 per share.

Sales of traditional toys have been hit hard by the economic slowdown and the entry of new, high-tech alternatives like the Apple (NASDAQ:AAPL) iPad into the games and entertainment arena.

However, a breakdown of Hasbro’s earnings report shows that the company actually preformed decently considering all the factors at work and beat analysts expectations for the quarter. The company also has plans for various news toys that will work cooperatively with, instead of trying to compete against, the massively popular iPad.

H = High Quality Pipeline

Hasbro has long been the maker of some of the most popular and recognizable toy and game brands in the industry. Particularly relevant in the holiday season that is almost upon us, Hasbro’s product line boasts the likes of Hot Wheels cars, Furbies, My Little Pony, Transformers toys, and the famous Monopoly board game.

T = Technicals on the Stock Chart are Strong

As of October 22, 2012, the stock price is .96 percent above its 20 Day Simple Moving Average; 1.02 percent above the 50 Day SMA; and 8.31 percent above the 200 Day SMA. Since the beginning of 2012 the stock price has been in an upward trend and is up 26.1 percent year-to-date and up 15.84 percent year over year.

S = Support is Provided by Institutional Investors & Company Insiders

Hasbro is 89.72 percent institutionally owned. Some noteworthy top holders include Bank of New York Mellon Corp., Cornerstone Investment Partners LLC, River Road Asset Management LLC, Charles Schwab Investment Management Inc., and Gannett Welsh & Kotler.

Here are some of the biggest most recent transactions by company insiders: Global Chief Development Officer Duncan Billing sold $758,599 of shares and exercised an option of $466,010 on August 8, while Global Chief Marketing Officer John Frascotti sold $792,498 of shares and exercised an option of $592,351 on July 30.

E = Earnings Are Not Increasing Quarter over Quarter

Hasbro’s earnings have bounced up and down over the last four quarters, and the most recent quarterly number of $1.24 per share showed significant improvement from the previous quarter’s 33 cents per share and a 3.6 percent dip from the year over year EPS of $1.27 per share.

Since earnings are fluctuating and not consistently increasing quarter-over-quarter, the stock seems too high for our risk profile.

E = Excellent Relative Performance to Peers is Suspect

Many investors favor Return on Equity as a key metric to how well the company is operating. Hasbro’s operational performance is not quite as strong as its primary competitor’s. HAS has an ROE of 24.47 percent while rival Mattel (NYSE:MAT) comes in higher at 31.31 percent.

Operating margins are also critical for stock evaluation. Hasbro also lags behind the competition with a margin of 13.60 percent compared to 18.12 percent for Mattel.

Conclusion

Practical reasoning and some of the hard statistics above would seem to frown on the purchase of Hasbro stock, as the old-school games and toys market feels like one that is destined to keep shrinking.

However, the counterpoint to that logic would be whether or not Hasbro can be successful in reinventing its image and product offerings. Plans to unveil Hot Wheels cars and Monopoly boards that can interact with iPads are in the works, as is an exclusive licensing deal with online social gaming company Zynga (NASDAQ:ZNGA) that will yield new toys inspired by popular Zynga games.  If such undertakings prove fruitful, its possible Hasbro can stay ahead of the downward-turning toy industry.

Until that time, Hasbro looks like a WAIT AND SEE based on the key metrics above.

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