Many times investors use peer or industry performance to ascertain whether a closely-related firm will perform in similar fashion. Though there is undoubtedly an association between end market demand for each firm in a given industry, outside of the commodity-producing spaces, individual firm-specific dynamics can often counteract or mitigate what otherwise could have resulted in poor performance for all, indiscriminately.
Mattel (MAT) sent shutters through the toy industry when it reported disappointed fourth-quarter results January 31. Much of the industry including Hasbro (HAS) and even Disney (DIS) traded off aggressively. However, we cautioned investors at that time that expectations had been reset lower for Hasbro and selling before the earnings release February 10 may be a bit premature. It turns out that it was. Shares are now trading higher than before the release. Again, this represents an example of how patience can serve to cushion you from mistakes. Said differently, get all the information before you make an investment decision.
That said, let's take a look at Hasbro's fourth-quarter results. In a very difficult environment for physical toys, the firm reported flat revenue performance for the period and net earnings of $1.12 per diluted share on an adjusted basis compared to $1.20 in the same period a year ago. The commentary was also much more encouraging than that of Mattel:
"In 2013, our Franchise Brands grew 15% with six of the seven brands growing, the Girls category increased 26% to reach a record $1 billion in revenues, our Games category posted 10% growth and our emerging markets increased 25% year-over-year. Cost savings efforts are lowering our underlying cost base and the increase in the quarterly dividend reflects confidence in our ability to profitably grow Hasbro over the long-term. We are entering 2014 with very good momentum in our brands globally, innovative new products and a multi-year pipeline of extremely strong film and television entertainment to leverage…Our cash generation remains strong and in 2013 we generated $401 million in operating cash flow. We remain committed to investing in the long-term profitable growth of our business and returning excess cash to our shareholders through both our dividend and our share repurchase programs."
Frankly, it's hard to be disappointed with the company's performance in light of the industry backdrop. Plus, Hasbro raised its quarterly dividend 8%, to $0.43 per common share ($1.72 on an annual basis, or 3.3% annual yield). The firm has increased its dividend significantly since we added it to the portfolio of the Dividend Growth Newsletter, and its capital appreciation has been among the best of constituents' as well. At some point, the difficult physical-toy industry environment will impact our decision to hold the company in the portfolio, but it will surface through our forward forecasts and our fair value estimate. At the time of this writing, however, we think shares of Hasbro are worth $60 per share, and we're pleased with its dividend growth performance. Valuation upside remains.
Disclosure: HAS is included in the portfolio of our Dividend Growth Newsletter. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.