The earnings are out and shares of toy maker Hasbro (NASDAQ:HAS) are soaring. Why?

Hasbro reported fiscal first-quarter 2014 earnings Monday morning, and while the company appears to have missed analysts' revenue targets, the actual profits Hasbro earned on these revenues were beyond reproach. In Q1, Hasbro:

  • Grew sales 2% to $680 million (falling about $10 million shy of estimates)
  • Earned "adjusted operating profits" of $0.14 per share, up 10% from last year
  • Reversed its year-ago net loss and reported a $0.24-per-share profit
  • Generated positive free cash flow of $220 million

Investors responded positively to the news, bidding up Hasbro shares in early market trading. But is that the right call?

Not necessarily. Hasbro appears to have beaten consensus estimates for earnings ($0.10 per share), replaced its year-ago loss with strong GAAP earnings in Q1 2014, and generated far more cash profit than its "net earnings" of $32 million suggest. That's all true. Free cash flow was nonetheless down year over year from the $273 million generated in Q1 2013. So from a cash profits perspective, the quarter's results were actually worse than what Hasbro achieved a year ago -- not better.

I calculate about $236 million in trailing free cash flow for the company. That's only about 73% of the $324 million that Hasbro has reported as its "profits" over the past year.

Valuation upshot
So, Hasbro has low quality of earnings. That would be OK, of course, if the stock were selling for a cheap enough price to discount this lack of quality and were growing its business briskly -- but it's not. In fact, Hasbro stock is selling for a premium multiple of 22 times earnings. And as for growth, analysts project a respectable, but hardly wildfire, five-year annualized earnings growth rate of just 10%.

Back to business
Valuation aside, though, how is Hasbro doing as a business? Actually, not too badly. While overall revenue growth was pretty sparse, there were some bright lights (Lite-Brites?) in Hasbro's Q1 results. Sales in the girls' toys category, for example, gained 21% year over year. Franchise brand revenue grew 15%. Entertainment and licensing revenues (where Hasbro takes toys such as My Little Pony and G.I. Joe and turns them into movies and cartoons -- "product placement" taken to its logical extreme) were up 13%.

These successes helped Hasbro to offset weakness in core businesses such as preschool and boys' toys, both of which saw revenues decline 4%. They illustrate, too, the strength of the company's diversified business model, in which a large number of ventures permit weakness in one segment to be balanced out by strength in Hasbro's other businesses.

What it all boils down to, therefore, is a situation not at all common in today's highly priced stock market: Hasbro is a good company... with a bad stock price.