The last time I wrote about Hasbro, Inc. (HAS) I stated, "Due to the fair valuation on next year's earnings, deteriorating financials, and decrease in earnings I'm not going to be buying a position at this price. With my quarterly realignment coming next week I believe this may be a great candidate to rotate out of the portfolio." After writing the article it proceeded to move higher to the tune of 3.14% versus the 0.49% gain the S&P 500 (SPY) posted and since it is time for my quarterly portfolio change-out I've decided to sell Hasbro out of the portfolio and replace it with Polaris Industries Inc. (PII) because I believe Polaris has a lot more growth to it than Hasbro.
Polaris designs, engineers and manufactures off-road vehicles including all-terrain vehicles and side-by-side vehicles for recreational and utility use, snowmobiles, and on-road vehicles including motorcycles and small electric vehicles. On January 28, 2014, the company reported fourth-quarter earnings of $1.56 per share, which beat the consensus of analysts' estimates by $0.01. In the past year the company's stock is up 52.12% excluding dividends (up 53.72% including dividends), and is beating the S&P 500, which has gained 21.91% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis when compared to Hasbro to show why I've made the switch for the consumer goods sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 24.18, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 16.91 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.24), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 19.5%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 19.5%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 17.5%. Below is a table of the fundamental metrics I look for in a company and shows how Polaris fairs against Hasbro. All data is as of 24Feb14.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 1.47% with a payout ratio of 36% of trailing 12-month earnings while sporting return on assets, equity and investment values of 22.5%, 50.1% and 46.2%, respectively, which are all respectable values. The really high return on assets value (22.5%) is important because it is a measure of how profitable the company is relative to its assets, telling us how efficient a management team is at using its assets to generate earnings (for comparison purposes, Thor Industries Inc. (THO) sports a ROA of 20.0% and Fox Factory Holding Corp (FOXF) sports a ROA of 17.2%). The really high return on equity value (50.1%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Fox Factory Holding Corp sports a ROE of 52.4% and Thor Industries Inc. sports a ROE of 30.3%). The really high return on investment value (46.2%) is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI then the investment should not be made (for comparison purposes, Arctic Cat Inc. (ACAT) sports a ROI of 22.8% and Fox Factory Holding Corp sports a ROI of 20.2%). Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.47% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 19 years at a 5-year dividend growth rate of 17.2%. Below is a table of the financial metrics I look for in a company and shows how Polaris fairs against Hasbro. All data is as of 24Feb14.
Payout TTM (%)
Looking first at the relative strength index chart [RSI] at the top, I see the stock is in middle ground territory with a value of 50.38 after bouncing off of being oversold back in early February. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars flattening out in height, indicating the bullish momentum is getting tired. As for the stock price itself ($130.55), I'm looking at the 50-day simple moving average (currently $135.08) to act as resistance and the 20-day simple moving average (currently $126.99) to act as support for a risk/reward ratio which plays out to be -2.73% to 3.47%.
I currently hold Polaris in my growth portfolio and decided to add a position into my dividend portfolio because it pays a dividend and won my Growth Portfolio Super Bowl back in late January. Remember, in my dividend portfolio I don't necessarily look for high yielders, I just look for stocks that pay a dividend. I felt that since Polaris won my Growth Portfolio Super Bowl that it was a good enough candidate to put into the dividend portfolio as well.
These are two different types of consumer goods companies, fundamentally I believe both companies to be fairly valued based on 2015 earnings, but I also feel that Polaris is valued much less expensively based on future growth potential and is the main reason why I'm picking up the stock. Financially, I'm giving up quite a bit of dividend but I believe it is okay because I like the capital appreciation opportunity much better with Polaris, not to mention management has awesome financial ratios all across the board. On a technical basis, Polaris is exhibiting tiring bullish trends. I have not initiated my position at the time of this writing but will do so tomorrow morning. I will provide reports on how each is doing against each other as the future progresses.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Additional disclosure: I am long PII in my growth portfolio as of right now but will be initiating a position in my dividend portfolio tomorrow morning.