Balanced Risk-Reward for Hasbro - Analyst Blog

On Jun 06, 2014, we issued an updated research report on Hasbro Inc. HAS.

On Apr 21, this leading toy maker posted mixed first quarter 2014 results with earnings beating the Zacks Consensus Estimate but revenues missing the same. Adjusted earnings per share of 14 cents were up 180.0% year over year, driven by higher year over year revenues, decline in expenses and lower share count.

Hasbro's net revenue of $679.0 million increased 2.4% year over year driven by continued growth in the Girls Category. Domestic revenues declined whereas international revenues increased in the quarter. The company was also successful in lowering costs, which improved margins.

We are encouraged by Hasbro's continued efforts to establish its presence worldwide through strategic partnerships, rapid growth in emerging markets as well as cost containment efforts to cope with a difficult operating environment.

Hasbro continues to enter into licensing agreements with various entertainment, film and television production companies that complement its brands. Also, the company is ramping up its efforts in digital gaming, a market that has strong growth prospects. In 2013, the company acquired Backflip Studios and expects it to contribute to revenues in 2014 and beyond. Backflip will focus on its existing product lines and launch new games, including those based on Hasbro brands. These initiatives provide Hasbro an opportunity to establish its presence in the digital gaming/casual entertainment category.

Meanwhile, emerging markets continue to contribute a significant share of Hasbro's revenues and the company expects these markets to witness double-digit growth in the long term. On the profitability front, Hasbro is advancing steadily through efficient sales leverage. Although revenues have been sluggish for the last few quarters, cost containment efforts to cope with a difficult operating environment have ensured decent profitability. The company has also outlined a company-wide cost savings initiative and is on track to deliver $100 million in savings annually by 2015.

However, despite improving trends in the first quarter, we believe that the Boys segment has a long way to go to regain its lost momentum amid a difficult operating environment. Though revenues from the Boys segment improved during the first quarter, this segment has been underperforming of late. The company is working to eliminate areas in this segment that are not likely to be productive in the long term. However, these initiatives may pressurize margins in the near term.

Also, consumer spending uncertainty still lingers amid sluggish economic growth in the U.S. with customers reducing their non-essential purchases which would impact the revenues.

Hasbro presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Electronic Arts Inc. EA and Activision Blizzard, Inc. ATVI. While Electronic Arts sports a Zacks Rank #1 (Strong Buy), Activision Blizzard holds a Zacks Rank #2 (Buy). Investors can also consider Columbia Sportswear Company COLM from the consumer discretionary sector that carries a Zacks Rank #2.