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Hasbro The Best Play In Toys

Posted: Oct 22, 2008 14:52 PM by Glenn Curtis

Tickers in this Article: MAT, HAS

Given the downturn in the economy, no one was shocked to learn on Monday that earnings for toymaker Hasbro (NYSE:HAS) slipped in the third quarter. The Rhode Island-based company saw its bottom line come in at about $138.2 million, or 89 cents per share, which is well south of the approximately $161.6 million, or 95 cents per share, it turned in during the same period last year. Q3 earnings aside, I am still bullish on the company for a few reasons.

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Enter Mattel
Hasbro's nemesis Mattel (NYSE:MAT) has a long and storied history similar to that of Hasbro, but I think that when it comes down to it, Hasbro is the better play. First, Hasbro managed to beat analyst's estimates by a pretty impressive three cents in the period. Meanwhile, Mattel released its third quarter earnings on the same day, and it earned 66 cents a share, which was five cents below what analyst’s had been looking for. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

Beginning in the June quarter and working backward, Mattel has beat estimates in two of the last four quarters, whereas Hasbro has beat the estimate in each of the previous four quarters. In short, these two factors make me feel a little more comfortable with the company and its ability to meet Street estimates going forward.

Currently, Mattel is expected to earn $1.44 per share this year and $1.67 per share next according to the data provided by Yahoo Finance. This implies a roughly 16% expected rate of earnings per share growth. Meanwhile Hasbro is currently expected to earn $2.18 a share this year and $2.51 a share next, implying a roughly 15.1% expected growth rate. (To learn more, read How To Evaluate The Quality Of EPS.)

I'll always go with the company that has been on a roll with regard to meeting/beating estimates, unless there are extenuating circumstances. I know what you are thinking: at present Hasbro trades at about 13.4 times the current year estimate (29.22 / $2.18), meanwhile Mattel trades at just 9.7 times the current year estimate ($13.99 / $1.44).

When it comes to results it seems that Hasbro has been much more on the mark lately. In other words, I'd rather pay more to get a slightly less (expected) growth rate that is actually achievable, instead of paying less for a slightly higher expected growth rate that will be very difficult to hit.

The Buyback
In Q3, Hasbro spent $150 million to buy back its stock - a hefty four million shares worth. This is important.

Buybacks say a lot about where the board thinks the company, and by extension the stock, is headed. Hasbro is spending a lot of dough on this buyback. The fact that the company saw fit to spend those resources to buy back its stock rather than say put it into advertising is, I think, a good sign as well.

Think about how tough the economy is these days and how hard some companies are struggling, yet, again, Hasbro decided to spend that money on it’s stock - wow! (To learn more, read A Breakdown Of Stock Buybacks.)

Unrealistic Q4 Expectations?
Currently, Hasbro is expected to earn 85 cents per share in Q4, which is almost 39% of the $2.18 that analysts are expecting this year. That means Q4 is make it or break it time. If it should disappoint in the final quarter, I think that the stock could get pummeled to say the least. Just because Hasbro has beaten estimates numbers in recent quarters, this doesn't mean that it's going to do so going forward.

Keep It Simple
Hasbro's Q3 wasn't spectacular when compared with last year. However, because Hasbro has exceeded estimates more frequently than Mattel in recent quarters, I think it's the safer bet. The stock repurchase is added reassurance that management has this company moving in the right direction.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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