When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Hasbro (HAS 2.19%) today, and see why you might want to buy, sell, or hold it.
Founded in 1923 and based in Pawtucket, R.I., Hasbro is a familiar name to many millions who, as children, once played with the toys it made. With a market capitalization a bit below $5 billion, the company's stock has averaged annual gains of 15.6% over the past decade and 6.5% over the past 20 years. (Rhode Island is so proud of Hasbro that a few years ago, more than 40 Mr. Potato Head statues were installed all over the state.)
One reason to consider Hasbro is its business. As long as there are children, there will always be demand for the company's toys and games. A glance at some of the brand names under its roof will make clear the kind of brand oomph it enjoys: Transformers, Littlest Pet Shop, Nerf, Playskool, My Little Pony, G. I. Joe, Magic: The Gathering, Monopoly, Furby, Twister, Battleship, Play-Doh, Cranium, Easy-Bake, Scrabble, Risk, Trivial Pursuit, and, of course, Mr. Potato Head. The company has high hopes for Furby's return this holiday season.
Hasbro's dividend is another big attraction. It recently yielded a solid 3.9%, and it has been raising its payout by an average of 16% annually over the past five years, with more room to grow.
A glance at Hasbro's financial statements offers more reasons to smile. The company's shares outstanding, for example, have been shrinking, from about 169 million in 2007 to 133 million recently. That's good, because it means that each remaining share represents a bigger stake in the company and thereby makes each shareholder's position more valuable. Share buybacks aren't always great, though. If a company buys back its shares when they're overvalued, it's destroying value, as that money could be more effectively spent elsewhere. And a steady reduction in share count can boost earnings per share, which is good, but ideally a company will grow its EPS by selling more and boosting its profit margins.
Hasbro's valuation isn't exactly at bargain levels right now, though, with its price-to-earnings ratio of 14 at about its five-year average. Its forward P/E of 11, though, is well below that.
For those who stress out over sharp stock-price moves, Hasbro's beta of 0.88 will also be welcome. Beta reflects volatility, and Hasbro's number suggests that if the market rises or falls by 10%, Hasbro will rise or fall just 8.8%. In other words, the company's rather stable. It's not likely that you'll see business drop off sharply at any time.
The company isn't just settling for its usual sales, either. It has been branching out into many directions, such as movies and online content. Its Hasbro Studios creates television programming for the domestic and global markets, distributed through The Hub TV Network and a partnership with Discovery Communications (DISC.A). It has also recently inked a deal with China's Alpha Animation to jointly develop content for China. The Hub is expected to contribute $300 million in revenue to Hasbro in 2012, and has been growing at a double-digit pace.
Another promising move is that Hasbro has also signed a deal with video-game maker Electronic Arts (EA 0.60%) to produce digital apps of its popular board games. And with beleaguered online game company Zynga (ZNGA), it has a deal in place to make board games based on Zynga titles such as FarmVille and Words With Friends. If that goes well, it could reward both companies.
One reason you might steer clear of Hasbro is that it hasn't exactly been growing very rapidly in recent years. The company hasn't been firing on all cylinders, either, with the Battleship movie disappointing at the U.S. box office, though doing well abroad. Hasbro has been tying movies and games together for a while now, such as by selling toys based on the movies Thor and Captain America. Much of this activity stems from a smart deal Hasbro struck with Marvel Entertainment to sell products tied to its movies and comics. (Marvel is part of Disney (DIS -0.29%) now.)
Meanwhile, its girls division racked up a 17% gain in the last quarter, but the boys division lost 12%.
Some also worry about the fact that the vast majority of Hasbro's sales come from just three vendors: Wal-Mart, Target, and Toys R Us. That's a bit risky, as it gives the retailers more negotiating power and significant potential influence over Hasbro's fortunes.
Meanwhile, Hasbro has competition, most notably from Mattel (MAT 0.47%). In fact, it appears to be a perpetual runner-up to Mattel. As my colleague Andrew Marder pointed out, "While Hasbro is a $5 billion company with $4 billion in annual revenue, Mattel is a $13 billion company with over $6 billion in annual revenue. But second place isn't necessarily a bad place to be." Still, Mattel has been growing its revenue more briskly lately, especially abroad.
Given the reasons to buy or sell Hasbro, it's not unreasonable to decide to just hold off. You might want to wait for revenue to grow more briskly, for example, and for the company to boost its sales more domestically. You might also wait to see how the company does in the upcoming all-important holiday season.
You might also look into other game companies, such as those in the faster-growing video-game industry, such as Activision Blizzard (NASDAQ: ATVI), Take-Two Interactive Software (TTWO 0.37%), or LeapFrog Enterprises (LF.DL). The video-game industry has had its own share of troubles recently, with costs rising and console sales slumping, but Activision Blizzard has been doing well by focusing on online sales and on boosting its profit margins. Take-Two has had much success with its Grand Theft Auto franchise, and has much riding on its Borderlands 2 release. LeapFrog focuses on more educational fare for younger consumers, and its stock has surged some 152% over the past year. Its LeapPad 2, a tablet for kids, has been selling well.
I'm going to pass on Hasbro at the moment, but I'm generally optimistic about it and want to keep my eye on it. It may well end up in my portfolio one of these days. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.