Monopoly, Candyland, Mr. Potato Head, G.I. Joe, My Little Pony -- Hasbro
Hasbro trails Mattel
Hasbro's cash conversion cycle improved from 115.7 days in 2001 to 77.5 days last year, but it trails Mattel's rate of 58.1 days. However, both companies experienced increases in 2004 over 2003. With the upcoming release of the annual report, it will be interesting to note whether Hasbro saw that number increase again in 2005, or kept it under control.
Hasbro introduces many new games and toys each year, and even brings back the occasional blockbuster such as Furby. Toys accounted for approximately 60% of revenues, while games accounted for the other 40%. Surprisingly, boys' toys account for four times as much revenue as girls' toys. It's also troubling to note that just three customers -- Wal-Mart
Among Hasbro's largest single expenses are licensing royalties -- making up about 18% of cost of goods sold --such as those paid to George Lucas for Star Wars-related games and figures. Raw materials make up another large expense: Plastic resin is made from petroleum, which has become more expensive lately. Hasbro tries to mitigate the impact of rising input costs by locking in prices for a full year. When those costs go up, though, it does have to raise prices. It's fairly easy to price newer toys to cover increased material costs. However, Hasbro cannot raise prices so dramatically on older toys such as G.I. Joe, so the margins for those toys go down.
Hasbro's moat exists primarily in the well-known names of many of its toys and games, the licensing arrangements for the toys and games it has developed from popular media (such as SpongeBob SquarePants), and its 30% market share. However, starting a new game company is not difficult, and good ideas can quickly lead to success, as Cranium has proved. Under prodding by such companies, Hasbro has revised many of its own traditional offerings -- releasing DVD versions of Trivial Pursuit, for example -- and has developed some tech-savvy toys, such as iDog.
Thomson First Call gives five-year growth rates of 10% (median and low) to Hasbro -- the high was 12%, but I never use the high estimate -- and 7% to 10% to Mattel. Using the latter set -- and being conservative with the lower growth rate -- for the first five years in a discounted cash flow calculator, half of that for the next five years, and a 3% terminal rate along with a 12% discount rate, Hasbro shows an intrinsic per-share value of $29 to $34, somewhat above the current price of about $21. Given its recent stock history, and assuming no growth in FCF other than to meet inflation (3%), the value is about $24.
The stock price has not moved much in the past two years. However, showing significant improvement in debt levels (debt-to-equity dropped from 1.05 in 2001 to 0.2 in 2004), a growing ROIC level, and the ability to generate free cash, Hasbro might be worth a more detailed look.
For more Foolishness on Hasbro, check out:
- Hasbro Plays to Win
- The Force Couldn't Save Hasbro
- Hasbro Plays Around With Downloads
- Marvel Toys With Hasbro
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Fool contributor Jim Mueller and his wife met while playing Dungeons & Dragons years before it became a Hasbro product. He does not own shares in any company mentioned. The Motley Fool is investors writing for investors.