Add a New Toy to Your Portfolio: Hot Stock Commentary

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This week’s hot stock comes from our comprehensive sector analysis on the Consumer Discretionary sector. We perform this type of analysis for each of the 10 sectors. Hasbro (HAS) is probably best known as the maker of popular toys such as Play-Doh, Nerf, and Monopoly. However, resurgence in its other brands, such as My Little Pony and Transformers, as well as planned expansions of existing brands, gives Hasbro great potential for years to come.

Hasbro has grown after tax profit (NOPAT) by 8% compounded annually over the last 10 years. The company currently has a 15% return on invested capital (ROIC), nearly $500 million in free cash flow on a trailing 12 month basis, and positive economic earnings for the past nine years. At the end of the third quarter of 2014, Hasbro announced that its total sales were up 6% over 2013 and operating income was up 45%. These increases were attributed to strong sales in Transformers and Marvel branded boys’ toys, and My Little Pony branded girls’ toys. Going forward, Hasbro has secured the rights to Marvel and Star Wars brands through 2020, and will obtain the rights to produce Disney Princess toys, including Frozen toys in 2016.

All the above are the biggest reasons that Hasbro receives our Very Attractive rating. Best of all, Hasbro remains undervalued despite these positive fundamental metrics. At its current price of ~$52/share, Hasbro has a price to economic book value (PEBV) ratio of 0.9. A 10% permanent decline in NOPAT seems overdrawn given the positive sales results and upcoming product lines touched on above.

If Hasbro can grow NOPAT by just 6% compounded annually for the next 10 years, the stock is worth $72/share, a 33% upside.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Photo Credit: William Warby (Flickr)

2 Comments

  • Brian

    January 20, 2015

    Morningstar rates HAS as carrying twice as much debt as the Industry average and revenue growth has substantially under performed the Industry average…Could you please comment on these two statistics…Thanks Brian

  • Kyle Guske

    January 21, 2015

    Brian thanks for commenting. While the total debt is elevated, much of it is long-term, with expiration dates ranging from 2017-2044. Hasbro has generated over $1.4 billion in free cash flow over the past four years, much of which is reinvested into the company. Because of the company’s free cash flow generation, we are not concerned about the debt dragging down future company results. It is something to watch for though, and must continue to be managed accordingly.

    Concerning revenue growth, it has lagged, however 2014 was a year of strong revenue growth for Hasbro. Despite growth below industry averages, Hasbro is becoming increasingly more efficient, growing their NOPAT margins every year since 2008. With revenue growth returning in 2014, along with the upcoming Marvel, Star Wars, and Disney Princess franchises, we believe 2015 and beyond will carry on the revenue growth and profit growth seen in 2014.

    -Kyle Guske

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