Market Overview

Hasbro Earnings Prove There's More Than Meets The Eye

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Hasbro (NASDAQ: HAS) reported earnings this morning that missed the mark on the bottom line but beat on the top line, as Transformers helped the Pawtucket, Rhode Island-based company report strong top line growth.

Shares are down around 3% or so as of the time of this writing, but the shining part of the report was the strong revenue growth led by Transformers. The company reported earnings of 42 cents per share on $908.5 million. Excluding one time items, Hasbro reported earnings of 33 cents, which missed the 39 cent per share estimate Wall Street analysts had. Revenues were expected to come in at $848.8 million.

Going forward, Hasbro's third and fourth quarters should be just as strong, perhaps even stronger, as the company's licensing revenue for latest Transformers starts being recorded in Q311. The share count continues to fall, going from 148.5 million shares a year ago to 139.2 million shares as of the end of the second quarter 2011. The company bought back 2.4 million shares worth of stock in the second quarter at an average price of $45.80 per share, some 10% below current levels.

Goldner said that he believes Hasbro is in strong position leading into second half, and based on the strong top line growth in the second quarter, one has to believe him.

Hasbro blamed the earnings miss on heavy investments in its television network with Discovery Communications (NASDAQ: DSCA), known as "The Hub," in addition to reorganizing its games division. The company is also raising spending on international expansion.

"We have continued to make important investments in our business which will help drive both top and bottom line growth in the future," said CEO Brian Goldner in the press release.

This was an incredibly strong quarter for Hasbro, led obviously by "Transformers: Dark of the Moon." The movie, panned by critics but loved by fans, has earned $762.8 million worldwide in three weeks of box office release, including $302.8 million domestically.

“As expected, top line momentum in our business began to build during the quarter, led by strong gains in the TRANSFORMERS brand, driven by TRANSFORMERS: Dark of the Moon, and BEYBLADE, as well as continued double-digit growth in the International segment,” Goldner said. “We have continued to make important investments in our business which will help drive both top and bottom line growth in the future. In the third quarter we are launching key new initiatives, including the global introduction of KRE-O, our new construction brand, the addition of the SESAME STREET brand to our preschool business, and innovative new products in core brands such as FURREAL FRIENDS and LITTLEST PET SHOP.”

Hasbro continues to develop brands, including launching its new Kre-O construction brand, preschool Sesame Street toys and other new toys this quarter, as well as continuing to generate new revenues from existing brands. With the success of "Dark of the Moon," there is no doubt that there will be more Transformers movies, and as such, more Transformers toys. The only question is whether it will be a reboot of the franchise, or a fourth movie. Director Michael Bay and star Shia LaBeouf have already stated they will not return to the franchise, so it will be interesting to see what direction the franchise takes.

In terms of valuation, Hasbro may be incredibly attractive here, and investors may want to use today's ~3% pullback to add to their position, or perhaps initiate a new one. Shares are cheap at less than 12 times earnings, and sport a dividend yield of 2.90%.

From a technical perspective, $39.57 is a very important price. It is the September 2010 pivot low, and there is strong support at that level.

ACTION ITEMS:

Bullish:
Traders who believe that Hasbro will continue to report strong results might want to consider the following trades:

  • Go long Hasbro near the $39.57 price point if you believe that Hasbro will continue generate strong revenues in the second half of 2011.
  • Buying long dated calls in the name could also be profitable and less capital intensive then buying the common stock.

Bearish:
Traders who believe that Hasbro's run has come and gone may consider alternate positions:

  • Shorting the name could be profitable, as it does not have an announced Transformers movie for the foreseeable future. This franchise drives a significant portion of the company's profits.
  • Perhaps going long Mattel (NASDAQ: MAT) or other competitors if you believe that Hasbro's market share will fall.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Brian Goldner Shia LaBeoufEarnings Long Ideas News Guidance Short Ideas Trading Ideas Best of Benzinga

 

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