Like one of its toys, Hasbro (NYSE: HAS) is transforming itself from a beaten-down cyclical into a highflier. Last year, shares of most toy makers were feeling the twin impacts of a gloomy economic forecast and toy recallscares led by Mattel (NYSE: MAT) and RC2 (Nasdaq: RCRC). However, since the beginning of this year, Hasbro has added more than 30% to its share price, mirroring rebounds by competitors LeapFrog Enterprises (NYSE: LF) and JAKKS Pacific (Nasdaq: JAKK).
Hasbro's first-quarter results were largely better than anticipated, primarily thanks to strength in the Transformers line, which benefited from a new animated TV series. Compared to last year, Hasbro's revenue grew 13% -- only 9% without the foreign-exchange benefit. Net earnings rose 14% to $37.5 million, but share repurchases popped per-share earnings past 31%, to $0.25 per share.
Buying back shares is just one way this company is managing itself well. While headlines will focus on the hot toy of the moment, usually following a new film release or the approach of the holiday toy season, many of Hasbro's products are mature moneymakers. The company generates a significant amount of steady cash, which it uses to repurchase shares (it bought back $156 million during the quarter), pay dividends (it just raised its quarterly dividend 25% to $0.20) and make strategic acquisitions.
Some investors will focus on the upcoming Iron Man, Indiana Jones, and Incredible Hulk movies for short-lived excitement. As a longer-term-oriented investor, I am interested in things like the timeless, predictable fun you get with board games. This quarter, Hasbro finalized the purchase of privately held Cranium. The company quickly moved to cut costs, reducing Cranium's headcount and eliminating overhead, adding the game to its established and profitable board-game portfolio.
Similarly, the company acquired the global rights to Trivial Pursuit, essentially buying out the royalty stream it was paying, securing the brand from being acquired by a competitor, and opening up new possibilities for the brand such as digitalization. Hasbro is also developing a Trivial Pursuit game show for television. While it expects the show itself to break even, Hasbro hopes the series will significantly boost sales of the games, especially if it can launch international versions of the TV series.
The stable cash flows these products supply are unlikely to deliver spectacular growth. However, they allow Hasbro to borrow relatively cheaply, or even self-finance initiatives that do possess higher growth potential. This model should give Hasbro more consistent and visible earnings, supporting a valuation multiple possibly even greater than its current level, and certainly larger than its peers'.
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