It sounds almost comical. Toymaker and Motley Fool Stock Advisor pick Hasbro (NYSE:HAS) has a toy deal with Star Wars creator George Lucas that runs through 2018. You might be wondering right about now -- isn't the last movie in the franchise in theaters right now?
So it is. Then why does Hasbro think that Star Wars toys will generate a profit for the next 13 years? What is so great about Star Wars?
Well, apart from Yoda, what's so great is the second-quarter earnings posted today. Net income is up 56.9%, helped by a 25% spike in U.S. toy segment sales. Star Wars toys did exceedingly well, but so did Transformers (more on that later), as well as my longtime favorite, Nerf.
International sales also increased 17.3%, similarly assisted by strong Star Wars toy sales.
The Star Wars boom, which will help the company post strong summer results, could provide an extra boost to results all the way through Christmas.
Overall sales for the quarter were up a modest 11% compared with last year's comparable quarter. Hurting results was an 11.6% decline in quarterly revenue for the game segment: Trading cards and board games were both weak.
Although the company is trumpeting the impact of continuing good results on its balance sheet, one has to ask whether the other shoe will drop after the Star Wars bonanza. Yes, it probably will, but the name of the game in toys and games is brands. And the more brands, the better. As tastes change, all you have to do is rotate or add products to meet customers' needs.
Perfect case in point -- few investors gave any thought to Mr. Potato Head until Pixar's (NASDAQ:PIXR) Toy Story brought new life back to this old franchise.
Speaking of brands, look at what's coming for Hasbro's Transformers toys. Hollywood kingpin Steven Spielberg and DreamWorks are working with Viacom's (NYSE:VIA) Paramount Pictures to make a live-action version of Transformers their tent-pole July Fourth weekend movie in 2007. This can only be good news for Hasbro's Transformer toys.
Hasbro is still a winner, too, when it comes to comparisons with competitor and Motley Fool Inside Value recommendation Mattel (NYSE:MAT). Both announced earnings today. Hasbro's operating margins were 4.7%; Mattel's were 3.2%.
When it comes to your investment dollars, do you go for the company with the fattest margins or the cutest doll?
Hasbro is selling for 18.1 times 2005 estimated earnings. That's a fat premium for a stock expected to grow earnings 10% annually for the next five years. But in reality, with Hasbro buying back its own shares and using its cash wealth to improve its balance sheet, the future could be brighter than analysts expected.
Pixar is also a Motley Fool Stock Advisor pick. Try a subscription to the newsletter and let Motley Fool co-founders David and Tom Gardner do the research for you.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned, although his grandson is the proud owner of a Hasbro Star Wars action toy. Clickhereto see the Fool's ironclad disclosure policy.
