I read lots of 8-Ks, especially when it comes to management changes and compensation. Rarely does one jump out at me the way the one filed by Hasbro (HAS) after the close. The company announced that its CEO, Brian Goldner, has extended his employment agreement by three years through 2017. This sounds like good news in and of itself, as Goldner (48) has done a decent job growing earnings, sales and the stock price since becoming CEO in 2008.
He joined the company in 2000 and was named COO in 2006. His background in advertising prior to his move to Bandai America (Power Rangers), where he was COO before joining HAS, helped him to transform the company to a provider of "branded play" from just a toy manufacturer.
As part of the new agreement, the Board implemented several small changes that are shareholder-friendly, but the big news that caught my attention was that the Board gave him a great incentive to drive the stock price higher over the next five years: 587,294 restricted stock units.
The award vests according to two different metrics: Stock price and time. He has to stay all five years before the stock is awarded. Additionally, he gets the first quarter if the stock trades to 45, the second quarter at 52, the third quarter at 56 and the final quarter at 60. The bottom-line is that if he can lead the company such that the stock price rises 58% over the next five years (from 38 to 60), he will end up with stock valued in excess of $35mm.
This powerful incentive aligns him well with outside shareholders. There are about 130mm shares, so this "Special RSU Grant" would mean that for him to earn his $35mm (in stock), the value of the company would increase by $2.86 billion. If the stock goes up only 18% (to 44.99), he gets nothing.
I thought highly of his incentives previously: His beneficial ownership (which includes options) at the time of the proxy cut-off in early March was 1.7mm shares (1.3% of the company). This special grant effectively doubles his current equity exposure, which was already quite considerable.
I have been looking at HAS over the past few months. I actually added rival Mattel (MAT) to my Conservative Growth/Balanced model portfolio right before it reported Q2. As I evaluated the two companies, I found them to be much more similar than different. While I felt at the time that HAS was likely a bit less expensive than MAT, I noted that MAT seemed to be performing better fundamentally. I think that the bull story is similar for both. In addition to exploiting brands in new media, like entertainment, both companies are rapidly expanding their sales to emerging markets. See for yourself how similar the stories appear. Here are their Investor Day presentations from almost a year ago:
While the alignment has improved as a result of the Board's award to Goldner, it was already excellent. Hasbro pays its executives a lot of stock relative to their total compensation, which has resulted in high insider ownership of 14% (including a 10% stake held by the Hassenfields). It uses smart incentives for its short-term bonuses.
I think that the stock is fairly attractive, with a forward PE of 13.5, which is in line with the S&P 500 and well below the 15.3 median over the past decade. The dividend yield of 3.9% is rather enticing. The annual growth has been 16% over the past five years as it has more than doubled. Looking ahead, I would expect the future growth to track earnings more closely, as the payout ratio is 50% roughly. The balance sheet is strong, with $841mm net debt (about 1X EBITDA). For comparison, MAT trades at 14PE with a 3.5% dividend yield.
As I mentioned, I went with MAT in my model portfolio, and this picture pretty much tells the story:
The chart on the left depicts the steady reduction in the 2013 EPS outlook for HAS, while the chart on the right shows the steady rise for MAT. The good news for HAS is that the decline stopped after it reported in July. Hopefully, the outlook for 2013 of $3.05 per share is achievable. To me, the analysts seem to be conservative on near-term prospects for both companies:
- HAS - 2013 Sales Growth = 2%, EPS Growth = 8%
- MAT - 2013 Sales Growth = 5%, EPS Growth = 10%
At this point, the two companies sound the same and the two stocks seem the same in many ways. Coke or Pepsi? It comes down to preference for the most part.
I think that the HAS Board of Directors has created a super incentive for its CEO, one that should encourage HAS investors. The stock is reasonably attractive from a valuation perspective, and the fundamental outlook is for modest growth. The recent halt to the decline in the outlook for 2013 is encouraging, and hopefully the Q3 report (a big quarter for the company, as sales were 32% of 2011 sales last year) will see the consensus hold or improve (10/22). MAT reports 10/16. Finally, the chart has improved, with the stock printing a 52-week high recently and seemingly coming out of a base formed over the past 14 months.
CEO Goldner is betting on better times. Should we?
Additional disclosure: The author includes MAT in one or more model portfolios he manages at InvestByModel.com