Hasbro Isn’t Playing Around: Why Jakk and Mattel Could Surprise

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Hasbro (NASDAQ:HAS) is one of three toy companies that I like to trade when the fundamentals set up properly. The other competitors that I also trade are JAKK (NASDAQ:JAKK) and Mattel (NASDAQ:MAT). Each of the companies has had its ups and downs over the years. Hasbro, JAKK, and Mattel each focus on different toys and products, but they all cater to children primarily. Key to the success of each company is its marketing and deal making. For example, JAKK recently had deals to produce Godzilla toys, giving the company’s first quarter a boost. Both Hasbro and Mattel have made many similar deals over their histories.

In this article, I will cover Hasbro. Relative to JAKK and Mattel, Hasbro is in between the two when it comes to valuation. Hasbro trades at 21 times earnings, whereas Mattel trades at 15 times earnings, but JAKK has been losing money for some time. As Hasbro has just reported, we can gauge how other toy companies may perform during a difficult time of year for toy companies.

Hasbro did pretty well and reported an in-line quarter with estimates. Net revenues for Hasbro’s second quarter increased 8 percent to $829.3 million from $766.3 million in 2013. Net earnings for the quarter were $33.5 million, or 26 cents per diluted share, compared to $36.5 million, or 28 cents per diluted share, in 2013. Adjusted net earnings for the quarter came in at $47.3 million, or 36 cents per diluted share. This compares to $38.3 million, or 29 cents per diluted share, last year. Quite the improvement year over year.

But how did we get here? Digging a little deeper into the performance, we see that Hasbro’s U.S. and Canada segment brought in net revenues of $383 million. This was a decrease of 2 percent compared to $389.2 million in 2013. There was growth in the Boys and Girls product categories but some large declines in the Games and Preschool categories. The U.S. and Canada segment reported operating profit of $46.9 million versus $59 million in 2013.

Internationally, things were much stronger. In fact, in this segment, net revenues increased 17 percent to $396.8 million compared to $340.2 million in 2013. Revenues in the International segment reflect double-digit growth in Europe, Latin America, and Asia Pacific, as well as growth in the Boys, Girls, and Preschool product categories. The International segment reported operating profit of $29.2 million, up 98 percent versus $14.8 million in 2013.

Further, the Entertainment and Licensing segment saw net revenues increase a whopping 35 percent to $47.7 million compared to $35.3 million in 2013. The Entertainment and Licensing segment reported 295 percent growth in operating profit to $14.6 million compared to $3.7 million in 2013.

Brian Goldner, Hasbro’s president and CEO, said in a press release: “Second quarter performance reflects our continuing re-imagination of brands across the brand blueprint and the positive impact of our investment and focus on strategic growth opportunities within Hasbro. Hasbro Franchise Brands, Emerging Markets and the Entertainment and Licensing segment posted strong second quarter growth. The combination of great brand innovation and storytelling is resonating with consumers globally to deliver revenue and profit improvements across multiple product categories and segments.”

Hasbro’s results suggest other toy companies could surprise. Looking ahead, the company paid $55.7 million in cash dividends to shareholders during the second quarter of 2014 and is on pace to continue paying a bountiful 3.3 percent yield. In fact, the next quarterly cash dividend payment of 43 cents per common share is scheduled for August 15 to shareholders of record at the close of business on August 1. To further create shareholder value, Hasbro repurchased a total of 2.5 million shares of common stock at a total cost of $136.3 million and an average price of $54.06 per share. Shares currently trade at $51.45. If they dip below $50, I think you do some buying here.

Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on Hasbro and a $57 price target.

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