I may be 37 years old, but I still feel like a kid. And my wife and kids will probably tell you that I act like one, too. But that is OK by me. I am a big believer in the old saw, "You're only as old as you feel"; it's one of those things that's as timeless as Mr. Potato Head himself.
What do you know?
Much like Peter Lynch, I believe many of the best investments are the ones that we know and encounter on a daily basis -- things that we know and understand because we use them in some capacity. And whether you are 3 or 37, Hasbro (NYSE: HAS ) is one of those companies for almost all of us.
But what gives Hasbro an advantage over competitors like Mattel (Nasdaq: MAT ) ? One way to get to the crux of the matter is to look at the company through the lens of Porter's Five Forces. With this model, we look at the company in regard to the power of buyers, power of suppliers, threat of new entrants, threat of substitutes, and industry jockeying (also known as rivalry).
Check out the graph below; this is my take on the Five Forces and how they are playing out right now for Hasbro. The forces are represented by colors. Red means the risk is high, green means it's low, and yellow puts it somewhere right in the middle:
Power of buyers
For the most part here, the buyers are retail stores stocking the toys and games that Hasbro sells. Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) represented 25% and 13%, respectively, of Hasbro's sales in 2009. Any squeeze by one of these two players and Hasbro could be feeling like it's stuck in a game of Twister. But seeing as the company has thousands of customers, I don't see any reason to panic.
Power of suppliers
What would they be without their toys? Most of the company's products are manufactured by third-party manufacturers in China as well as company-owned facilities. Given that Hasbro's products are mostly plastic and paper, shortage of supply is not necessarily a worry. The problem with making so much stuff in China, though, is that any type of political fallout or trade embargo can cause headaches for a company like Hasbro.
Threat of new entrants
While this threat will always exist in some capacity for virtually any company, Hasbro has been in business since 1923 and is virtually a symbol of Americana itself with brands such as Playskool, Transformers, Nerf, and G.I. Joe, to name a few. This diverse catalog gives the company tremendous flexibility, and I don't see this as any type of real long-term threat.
Threat of substitutes
This becomes a bigger threat as the years go by and technology continues to take hold. There is a lot of competition for entertainment dollars today for young and old alike. The neat thing is that Hasbro is taking advantage of this by building relationships with companies like video game monster Activision Blizzard (Nasdaq: ATVI ) and Discovery Communications (NYSE: DISCK ) via The Hub television channel.
Industry jockeying (rivalry)
Toys are a competitive industry. As technology advances, toys become more interactive and appealing to a wider range of audiences. Board games are becoming video games, toys are turning into movies -- who knows what is next? Integrating new technology into Hasbro's legendary portfolio will only grow in importance, and it will need this to stay relevant.
The Foolish bottom line
Hasbro is a leader in their industry that much is clear. What is also clear is that today there are more ways for toys and games to be a part of our lives than ever before. The company will need to continue to stay on top of this curve in assessing how it gets its products out to consumers. As it stands, Porter's model tells me Hasbro has established a solid competitive position in the toy business. But as times change, so can the model. As such, Hasbro will need to keep its head in the game if it wants us to keep playing with its toys.