Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Hope springs eternal for Hasbro (NASDAQ:HAS).

It was roughly one year ago that I last wrote about Hasbro. Investment banker Jefferies had just announced it was upgrading the toymaking giant to buy and predicted that Hasbro stock, then trading for $109 a share, would shoot up to $125 within a year. One year later, however, Hasbro shares have languished. Weighed down by investor pessimism over the bankruptcy of Toys R Us and its implications for the toys industry, Hasbro stock today sells for less than $99 a share.

And yet, this morning, another analyst has stepped forward to sound the all-clear for Hasbro. Perhaps encouraged by better-than-expected earnings results last month, investment banker MKM Partners announced today that it's upgrading Hasbro stock to buy, as explained in a write-up this morning on StreetInsider.com (subscription required).

Here's what you need to know.

Cardboard spinner, game pieces and dice

MKM spins the wheel on Hasbro stock. Will it come up a winner? Image source: Getty Images.

What happened in Q2 for Hasbro

Let's start with a review of Hasbro's Q2 earnings, which came out July 23 -- and fair warning, the news wasn't great.

Q2 sales at Hasbro fell 7% year over year, and net profits declined nearly 11%. Not only did the Toys R Us bankruptcy hurt results, but Hasbro also carried too much inventory into Europe, necessitating discounts to keep merchandise moving. But for an earnings boost from tax reform, the results would have been even worse.

"Gaming revenue" was flat, "partner brands" revenue dropped 10%, and "franchise brands" revenue declined 8% in the quarter, with sales of Magic: The Gathering merchandise -- celebrating its 25th anniversary this year -- being one of the few bright spots.

Why MKM is optimistic

And yet, MKM Partners was unfazed. Despite sales and earnings declines, the news wasn't quite as bad as Wall Street had feared and Hasbro beat expectations for the quarter. As Hasbro moves on through and past 2018, and the Toys R Us bankruptcy passes into the rearview mirror, MKM believes investors can look forward to seeing a "material fundamental recovery" for Hasbro over the next two years.

Hasbro has made "multiple, large toy line additions" such as its recent purchase of Power Rangers that could boost sales. A partnership with Netflix is expected to result in a new a line of Playskool toys and games based on the Super Monsters series for kids, and Hasbro could also reap potential "benefits" from Hasbro's investments in feature films production.

Apply just "modest margin expansion" to the new revenue streams coming on line, and MKM argues that Hasbro could enjoy "double digit average bottom line growth" over the next couple years, culminating in as much as $6 per share earned in 2020.

Valuing Hasbro

Will that be enough, though, to make Hasbro a buy, or to achieve the new $115 price target that MKM has set for Hasbro stock?

I'm not so sure. On the one hand, $6 a share in annual profits would certainly be a nice improvement over the $1.65 per share that the company has earned so far over the last 12 months. It's also worth pointing out that MKM is not the only analyst foreseeing good things for Hasbro.

According to analysts surveyed by S&P Global Market Intelligence, Hasbro is expected to earn well over $4 a share before this year is out. In 2020, the average consensus estimate is that Hasbro will earn $5.69 per share -- not too far off from MKM's $6 prediction. Earning $6 a share would also work out to a pretty reasonable-sounding 16 times earnings valuation, based on Hasbro's stock price today.

On the other hand, though, valued on the earnings it has actually managed to produce so far -- i.e., still just $1.65 for the past 12 months -- Hasbro stock is selling for 59 times earnings today. Even assuming MKM is right about the company growing earnings at double-digit rates over the next two years and those double digits are closer to 20%, say, than to the 10% that most analysts forecast for Hasbro, the stock would still look expensive at a PEG ratio of close to 3.

I simply don't see a lot of value in Hasbro stock at today's prices. I can't help but wonder if MKM is jumping the gun in recommending it.