Hasbro Has "The Touch", Should You Add Though?

In a research note, Goldman Sachs is constructive on Hasbro

shares, as "Transformers: Dark of the Moon" is set to be released next week. It is very possible that the New York-based investment bank is not being as optimistic on the film as it should be. In the note, Goldman writes, "We believe strong box office results for Transformers 3 may serve as a positive catalyst for HAS shares as we do not believe the consensus is factoring in the full magnitude of the sales/EPS impact from the movie. We forecast $600mn of Transformers sales in 2011, in line with the sales level in 2009, and $300mn above the 2010 level. We expect growth in International markets and strong support at Wal-Mart to offset declines at other US toy retailers. A total global box office of $160-200mn for Transformers in its first week ($80-100mn each domestically and internationally) would imply the movie is tracking at the pace of the prior two movies, each of which grossed $700-800mn worldwide." Many are expecting "Dark of the Moon" to have a much stronger opening weekend than $80-$100 million in the United States, as it looks like it may be the best movie of the three, from early reviews, and online indicators, such as blogs, message boards, and various movie websites. This is the last Transformers movie that Hasbro has on the slate before a potential reboot which is years away. Director Michael Bay and star Shia LaBeouf have already said they will not return for a fourth movie. Many are indicating perhaps a $120 million opening weekend, and given the fact that the movie is now opening on June 29 instead of July 1 gives the movie two additional days to generate extra box office receipts. Goldman has a $58 price target on shares of Hasbro, well above where shares are currently trading, which if the company can generate the $3.33 per share that Goldman expects, seems reasonable. Transformers is probably the biggest property that Hasbro has right now, as the popularity for the franchise has not been this high since the 1980's, when the television show and toys first appeared on U.S. shelves. Hasbro has done an excellent job of monetizing this property, as well as its other properties, such as G.I. Joe. In addition to its own properties, Hasbro is making the toys for Captain America, Thor, and other comic book movies this summer, which should help generate earnings growth for the future. Goldman goes on to say in the note, "We expect a 37% contribution margin for incremental Transformers sales (30% for toys and 70% for royalties from licensees). This implies 100-200bp of margin expansion in 2011, above consensus estimates. We forecast $0.56 of EPS impact from Transformers, which is a key driver of our above consensus $3.33 EPS forecast (vs. $3.06 consensus). We expect HAS to reach this level of earnings even with a modest board game decline and continued dilution from the HUB." To quote Optimus Prime: "One shall stand, and one shall fall." From the looks of things, it looks as if Hasbro shares will be the one standing.