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Investopedia Advisor submits: At first blush, Hasbro’s (NASDAQ:HAS) second quarter earnings release after the market close this past Monday (July 24) didn’t look so good. I saw it come across the tape: “Hasbro’s Q2 Profit Falls.” My heart initially dropped, because after Mattel’s (NASDAQ:MAT) upbeat second quarter earnings release the week before, I thought the group would fare quite well. But my initial reaction proved wrong, because a closer look at the earnings report shows that the toymaker’s fundamentals appear quite solid.

For the record, in the period ending July 2, Hasbro reported that earnings dropped 8% to $27.1 million, or 7 cents a share from last year, and that revenue dropped 7.8% to $527.8 million during that same time.

But it’s important to keep in mind that these numbers aren’t a totally fair comparison.

This is because the company was going up against a really great quarter last year, when its Star Wars products were flying off the shelves after the movie release. So, if you peel away the Star Wars business, and make an apples-to-apples comparison, Hasbro would have actually shown a more then 9% increase in sales, which isn’t too shabby!

What I was most happy with during the second quarter was that a broad array of products including: Playskool, Monopoly, Nerf, Transformers, and GI Joe are actually selling better then they were in the same period a year ago. Why is this so important?

It is because toy companies are notorious for going through boom and bust cycles. So when a company can spread its risk among several product lines, that appeal to both sexes, and have a wide price point range, it is a good indicator that if one group of products should fall, as Star Wars did, that others will pick up the slack.

Another interesting tidbit that I think was overlooked in the release was the fact that during the quarter repurchased 10 million common shares (under its ongoing share repurchase program) at a total cost of $192.6 million, or about $19.26 a share by my calculations. This is a really good sign, because if you think about it, management could have used that cash in any one of a number of ways. It could have used it to make a small acquisition.

It could have returned the cash to shareholders in the form of a dividend. It could have used it to pay short-term expenses, or it could have simply retained the cash for a rainy day. Instead, it chose to go into the market and invest in the shares. This speaks volumes about management’s confidence in the future.

Next, look at the company’s balance sheet. Its inventory number is down from last year (to $258.5 million from $262.47 million). This is good because it means the company isn’t stuck with a bunch of out of date merchandise that it would otherwise have to sell at a low price. Its receivables are lower as well (currently at $290.5 million versus $348.2 million last year) which indicates the company is being paid on a timely basis.

Also, consider that the company’s current assets outnumber its current liabilities by a ratio of almost two to one. In other words, it has enough cash to meet its payment obligations, and to continue to grow.

Now let’s compare it to Mattel. Mattel and Hasbro both have relationships and licensing agreements with outside firms that are hard to value, such as Mattel with Disney (NYSE:DIS). Mattel and Disney teamed up to make products based on the new “Cars” movie, while Hasbro is producing a new baby-care line it plans to market for CVS drugstores (NYSE:CVS). The numbers suggest that Hasbro is the stock that is undervalued.

Considering that Mattel trades at roughly 3.4 times its book value, $5.27, has a trailing twelve-month operating margin of 12.46%, and is expected to grow its earnings from $1.25 a share in 2006 to $1.31 a share in 2007, implying an expected earnings growth of 4.8%. While Hasbro has a lower trailing operating margin, of about 9.9%, it trades at just 2.4 times its book value, $8.21 share, and is expected to growth its earnings from $1.15 a share in 2006 to $1.35 a share in 2007, implying an expected growth rate of 17.4%.

Which company is the better value based upon this information? In my opinion, it’s Hasbro. Plus, remember that we are going into the second half of the year, when toy companies traditionally fare quite well.

In short, Hasbro’s second quarter results suggest that the company is on a fairly solid financial footing. And going forward from here, if the company is able to hit its earnings targets, I think the shares would be more fairly valued in the $23 to $24 range over the next year, suggesting a potential appreciation of more then 19%.

HAS 1-yr chart:

By Glenn Curtis, Contributor - Investopedia Advisor

Source: Toymaker Hasbro's Fundamentals Appear Solid