Smart Investing


December 9, 2011


Hasbro isn't all fun and games

I love to read from people who have been investing for 30 to 50 years, because they have so much valuable information for us to learn.

One of those longtime legends is James P. O'Shaughnessy, who has a new book called “What Works on Wall Street.” His flavor varies some from a Warren Buffett or a Peter Lynch, but the main message is still pretty much the same. He talks about the stocks that everyone wants to own in the short-term — you know, the ones with the sky-high price to earnings, price to book value and price to sales ratios.

He admits they're very appealing in the short term, but deadly over the long haul. And please, don’t think that you will be the one who knows the correct time to get out. Some get lucky some of the time, but no one gets it right most of the time, or even enough to have good long-term returns. He also says that successful investing isn’t alchemy; it’s a simple matter of consistently using time-tested strategies and letting compounding work its magic.

Last year, starting in November, leading up to Christmas, I was talking about Mattel and how good the fundamentals looked, along with a 3.5 percent dividend.

A year ago, the stock was trading at $25 to $26 per share. Last week, the stock was around $28.50, about a 12 percent return, and with the 3.5 percent dividend, investors have enjoyed a 15 percent return on Mattel. Mattel still trades around a 13 PE, so I would not recommend a sell here.

This year, I thought I would look at one of the company's competitors and see how it is doing. The company of choice this year is Hasbro Inc., which trades under the symbol HAS.

Hasbro Inc. engages in the design, manufacture and marketing of games and toys. The company principally provides for children’s and families' leisure time, and entertainment products and services. It offers various games, including traditional board, card, hand-held electronic, trading card, role-playing and DVD games, as well as electronic learning aids and puzzles.

Hasbro’s toy products include action figures, vehicles and playsets, electronic toys, plush products, preschool toys and infant products, electronic interactive products, creative play products, and toy-related specialty products.

The company also licenses certain trademarks, characters and other property rights to third parties for use in connection with consumer promotions, and for the sale of noncompeting toys and games, and non-toy products. It offers its products primarily under Playskool, Transformers, Nerf, My Little Pony, Littlest Pet Shop, Tonka, G.I. Joe, Milton Bradley, Parker Brothers, Cranium, Avalon Hill, Tiger, Furreal Friends, Baby Alive, Strawberry Shortcake, and Wizards of the Coast brand names.

The company markets its products to various customers, including wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and other retailers, as well as Internet-based e-tailers. It has a strategic licensing agreement with Electronic Arts Inc. to provide EA with the worldwide rights to create digital games for various platforms, including mobile phones, personal computers and game consoles, as well as a strategic relationship with Universal Pictures to produce approximately three motion pictures based on some of its specific brands.

Hasbro sells its products through its own sales force and distributors primarily in the United States, Canada, Mexico, Europe, the Asia Pacific, Latin America and South America. The company was founded in 1923 and is headquartered in Pawtucket, R.I.

From last year, its stock has fallen from around $47-$48 to $36 and change. Hasbro also pays a 3.2 percent dividend. However, an investor’s total return would have been a loss of around 20 percent. Hasbro has a current PE of 12.7 and a forward PE of 11 based on December 2012 mean estimates of $3.30/sh. Price to tangible book of 11.2 is twice that of the industry average of 5.4, yet price to cash flow is about half the industry average of 15.8, at 8.6. Over the last year, sales for Hasbro have increased only 3.3 percent, when the industry average is up 14.9 percent. Earnings for Hasbro have held steady at 1 percent, when the industry had a 14.4 percent decline in earnings per share.

Things were looking OK for Hasbro until I got to the balance sheet and saw a debt/equity of 103 percent when the industry is at 32 percent. Hasbro does have a good current ratio of 2.4 compared to the industry at 2.0, but an investor would have to have a strong stomach for all that debt. If one were to invest in this company, you would have to watch the debt level in hopes that management will pay some of it off as opposed to increasing it.

Return on equity looks good at 27.9 percent versus the industry at 5.6 percent. Hasbro also brings in about 9.5 cents for every dollar of sales, while the industry average is 1.4 cents for every dollar of sales.

I also noticed a concern on the receivable turnover of 3.4, which is well below the industry average of 10.4. There could also be a problem with the inventory turnover at 3.6 for Hasbro, compared to the recreational products industry at 5.01 over the last 12 months.

So maybe one of the Transformer games would be a better investment than the stock. Or maybe the company can transform some of the debt into equity.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


December 9, 2011