Dueling Fools

Dueling Fools
Is Hasbro a Has Been?
May 19, 1999

Hasbro Bear Argument
by Rick Aristotle Munarriz (tmfedible@aol.com)

Today, names like Queen Amidala and Darth Maul will become household words. Tomorrow, they will rule toy wish lists. I'm sure Louis has effectively mapped out how this overnight fascination will translate into a wad of money for Hasbro. Woohoo! Go Hasbro! But I doubt he got around to telling you who would lose out big here. Disposable income is not infinite. For every Jar Jar action figure that's sold there's one more Hasbro-owned Tonka truck or Milton Bradley board game that goes back on the toy store shelf.

The big winner is Hasbro. The big loser is Hasbro. I'd call this a zero-sum game except for the fact that if Hasbro was selling it as a new Parker Brothers plaything this summer it would go unpurchased.

This is important because the investing community seems only to be keyed in on the positives here -- with the stock having doubled over the past year. If only we were playing with Monopoly money. Maybe that way we could continue to pay up in carefree mode without pondering the value of what we were buying. Maybe that way we could overlook that bright red beacon resting just one square before Go paydirt.

Let's get the hottest thing out of the way first. It's young boys, and not young girls, who will be clamoring for the Anakin Skywalker jet fighters this year. The kids concocted from sugar and spice and everything nice will probably still want the Barbies and Beanie Babies -- all of which are made by Hasbro's competitors. Hasbro is taking from Peter to pay Paul. They never had much to offer for Mary. It's Has-bro, not Has-sis.

Will Hasbro's sales go up? Sure. But what about bottom line margins? Unlike Hasbro's portfolio of traditional toys, there are two major disadvantages to these Force'd sales. The first is that George Lucas is taking a juicy cut off the top. To win the 10-year Star Wars licensing deal Hasbro was the highest bidder and will pay up $600 million in advances on royalties. That means that Hasbro does not have the pricing flexibility that it does with proprietary brands since it has to mark the products up high enough to overcome the licensing expenses.

Folks will pay up, for now. But that leads to the even bigger concern, a few months down the road, when Queen Amidala goes from her Naboo throne to the clearance bin in Aisle 12. The shelf life of movie tie-ins is painfully short. Hasbro's Mr. Potato Head should remain a big seller next year, but will Darth Maul? That's how it goes with licensed flavors of the month. Right now Hasbro may be selling a ton of Pokemon, Furby, and Teletubbies -- is there anybody here naive enough to believe that they will be stellar sellers next year?

Don't get me wrong here. Hasbro is a solid company. A growing company. The company earned $1.01 in 1996 and is projected to earn $1.57 next year. That's a decent 12% annualized growth rate over this four-year term, even if it's inflated with the Star Wars dowry. Still, if you can pick up Hasbro for 12 or 13 times earnings, which is where it was a year ago, you might do pretty well in the long run. The problem is that over the past year the shares have soared, discounting earnings all the way to the year 2006. That's right, if you were hoping to buy Hasbro at a price point where its P/E ratio equaled its 12% growth rate you are either one year too late or seven years too early.

And, if you go beyond Hasbro's "Ages 4 and Under" life cycle, things get downright bleak. In 1993 the company reported higher pre-tax profits than it did last year -- and with only half of the long-term debt.

You see, Risk is more than just a Hasbro product -- it's a Hasbro reality.

Next: The Bull Responds