Patient Investors Are Paid To Wait In Hasbro

Jul.25.12 | About: Hasbro, Inc. (HAS)

Toy-maker and dividend growth gem Hasbro (HAS) reported stronger than expected earnings on Monday morning. The firm earned $0.33 per share during the second quarter, $0.09 more than what consensus was looking for and flat year-over-year. Revenue fell 12% year-over-year to $812 million, slightly shy of consensus expectations. However, excluding foreign exchange headwinds, revenues fell 7%. Our fair value estimate remains unchanged.

Similar to competitor Mattel (MAT), Hasbro was able to increase its earnings despite lower revenue. Operating profit in the US and Canada segment jumped 6% even though sales tumbled 19%. The firm has previously stated that the revenue mix will be shifted 2-4% more heavily in favor of the back half of the year, so this drop in the revenue was anticipated. International revenue did not decrease as heavily, falling just 4% thanks to strong growth in Latin America that was offset by weakness in Europe and Asia. Excluding the impact of currency, aggregate international revenue grew 5% and fell only 1% in Europe. Though foreign exchange headwinds will likely persist, we think exchange rate fluctuations will largely counteract each other in the long-run.

With the shift in the quarterly revenue mix, it's actually difficult to ascertain the strength or weakness of the results in either segment. Hasbro confirmed that in addition to the shift in the revenue mix, some of the revenue decline can be attributed to tough comparisons from Transformers in 2011, as well as new releases being shifted to the back half of 2012. The firm continues to believe it will post higher revenue and earnings in 2012, ex-currency. We also think that shifting production and shipping to coincide with demand surges should boost operating margins.

Though the US/Canada and international segments posted mixed results, the company's entertainment and licensing division reported very strong top and bottom line growth. Revenues in the segment grew 59% in the second quarter, to $43.2 million. Since this marginal revenue is almost entirely accretive to earnings, operating profits in the segment grew tremendously (1,239%) to $8.2 million. Hasbro sold the rights to several shows in the US and abroad during the second quarter. Though Battleship might not have been the domestic phenomenon many expected it to be, the movie posted solid international box office numbers, so we suspect licensing of Hasbro games and toys will remain strong.

During the second quarter, the firm repurchased just shy of $5 million in stock and still has $217.3 million available in its stock buyback program. With a healthy balance sheet of nearly $780 million in cash--as well as robust free cash flow generation--we believe the firm will continue to raise its dividend and return cash to shareholders. Even though shares are surging today, we think they are trading at a healthy discount to our fair value and post a solid score of 7 on the Valuentum Buying Index. With its annual dividend yield over 4%, we think Hasbro is a very compelling idea at its current price. Even if turmoil in Europe prevents stocks from converging to their true values over the near term, patient investors will be paid to wait in Hasbro.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: HAS is included in the portfolio of our Dividend Growth Newsletter.