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It's Not All Fun and Games for Hasbro

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Unless retailers see evidence of consumer demand for traditional toys and games, analysts believe they're going to be hesitant to dedicate more shelf space to toymakers this Christmas season, and with digital games trending higher, that's a burden that will fall more heavily on Hasbro (Nasdaq: HAS  ) than on its rivals that don't rely as much on board games.

Hasbro generates more than a quarter of its revenues from games and puzzles, and sales have been falling throughout the year. Segment revenues were down 7.5% last quarter and are down more than 8% so far in 2012. With Hasbro reporting earnings before the market opens Monday, analysts are sending the toymaker to the corner for a timeout, with Goldman Sachs (NYSE: GS  ) downgrading the stock to a sell.

Is there trouble in toyland?

All the marbles
(Nasdaq: MAT  ) just recorded global revenues rising 4%, with international sales defying European economic turmoil and coming in 2% higher than a year ago, and that's even after unfavorable currency exchange rates took away 9 percentage points of growth. Profits came in at $1.04 per share, beating expectations of $0.99 and well ahead of last year's $0.86-per-share effort .

Considering Hasbro counts on international sales almost as much as Mattel does (the former realizes 45% of its revenues from the segment; the latter, 47%), it ought to gain the same benefit while facing the same currency headwinds. Latin America, for example, saw a 15% jump in revenues last quarter, and if you back out currency effects, it was double that . Yet because games and puzzles make up a good portion of the international results, they may not be as robust this time around.

Its name up in lights 
Where Hasbro really differentiates itself from Mattel, JAKKS Pacific (Nasdaq: JAKK  ) , or LeapFrog Entertainment (NYSE: LF  ) is its entertainment division that houses The Hub television channel and its movie licensing deals. Programming on The Hub includes content that's been developed by Hasbro and is based on its brands as well as programs made by third parties. Hasbro expects to generate about $300 million in revenues in 2012 from the channel and last quarter showed continued improvement with 54% growth, outpacing all other children's networks .

While the movie division makes it more like Disney (NYSE: DIS  ) than its peers, it's also the unit that poses the greatest risk. Blockbusters make for very lumpy results, and moving behind the camera adds an element of uncertainty.

I've been critical of the toymaker's resolve to throw every brand it has up on the movie screen, since fleshing out a treatment for Chutes and Ladders risks damaging its brand if every production simply appears to be a 90-minute commercial.

Battle royale
I think that was borne out by its Battleship movie, a hot mess that stretched credulity as it strained to remain relevant to its roots. While it made $302 million in worldwide box office receipts , the domestic gross was just $65 million. It's possible it hurt its ability to collaborate with studios on other projects.

Universal Studios dropped the film version of Clue, which would seem a natural movie tie-in, and decided not to produce a movie based on Hasbro's Ouija. Viacom's (Nasdaq: VIA  ) Paramount reportedly also passed on the opportunity to make them and has delayed releasing the G.I. Joe sequel to redo it in 3-D, suggesting the studio didn't think it could stand on its own. Unlike Marvel, which has a strong portfolio of characters that translate well into movies, the toymaker's reliance on board games makes that same transition more difficult.

Price is what you pay
Analysts expect Hasbro to earn $1.20 this quarter, down from the $1.27 it earned a year ago, but also well below the $1.31 they were forecasting after the second quarter. Full-year revenues haven't been similarly scaled back.

At just under 15 times earnings estimates, it doesn't look so expensive, particularly when compared with Mattel, but with its enterprise value trading at around 16 times the free cash flow it generates, I don't see it as the same bargain stock I did at the start of the year. I also think the fears that Hasbro will be shipped off to the Land of Misfit Toys might be a bit overblown, too, but the toymaker faces different risks and opportunities than Mattel. Let me know in the comments section below whether you agree Hasbro is a stock you'd continue playing with.

Set a play date
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Rich Duprey owns shares of Walt Disney and Hasbro. The Motley Fool owns shares of Walt Disney, Hasbro, and Mattel. Motley Fool newsletter services recommend Walt Disney, Goldman Sachs, Hasbro, LeapFrog Enterprises, and Mattel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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