The investing phrase "Growth at a Reasonable Price,"
orGARP for short, likely sums up the ideal backdrop for many
investors. Yet many stocks right now appear to possess fairly dim
growth prospects and really only appeal to value-oriented
I added toy maker
$100,000 Real-Money Portfolio
last month largely on the basis of a very cheap valuation.
Yet, the real appeal for me is that investors were mistakenly
seeing this as a company that has moved past its heyday. "Shares
are a bargain now simply because Hasbro has hit another speed bump
on its path to long-term growth," I wrote a few weeks ago, adding
that an upcoming investor presentation would help investors see
just how much growth still lies ahead.
[block:block=16]Well, that presentation just took place, at the
annual New York City Toy Fair, which is always an opportunity for
Hasbro to lay out goals for the year ahead.
The bad news: Management failed to issue robust sales andprofit
growth targets for 2012.
The good news: Hasbro is pursuing so many new opportunities right
now that sales growth should begin to build later this year and
really take off in 2013.
Right now,Wall Street is looking for about 2% sales growth in 2012
and 2013. The 2012 forecast looks a bit low, and growth could be
closer to 4-6%. The 2013 consensus view is far off the mark, and
sales growth could move toward the 10% mark, with an even sharper
boost to profits. As that outlook begins to clarify in coming
quarters, look for a steady expansion in Hasbro's multiple, meaning
the stock should go up.
Hasbro is clearly a company in transition. The company is on the
downslope of a robust spurt in royalties tied to film franchises
for its toys such as Transformers. And many of the company's
long-standing games and puzzles are experiencing secular declines.
Yet so many other aspects of this business are moving in the right
Take international sales as an example. Back in 2006, international
revenue was just 35% of the total sales mix. Now it's 43%, on its
way to 50% within a few years. Said another way, international
sales have been growing at a 10% pace and should continue to do so
in 2012 and 2013 as well.
Hasbro's heavy investments in its 50%-owned Hub television network
are also beginning to pay off. Hasbro spent several hundred million
dollars building up the network, which is now starting to reap real
gains. So many of Hasbro's key characters and brands are highly
visible on The Hub, and management ran through a broad slate of
initiatives that willcapitalize on them, especially in the area of
games and licensing.
Yet it's the recent announcement with
Zynga (Nasdaq: ZNGA)
that should really give investors a clue as to where Hasbro is
headed. Hasbro will develop a series of toys and board games based
on Zynga's top-selling digital games, paying Zynga what appear to
be modest royalties.
The deal should kick off a string of other efforts to move Hasbro
into the digital age. Many of the company's longstanding brands
such asMonopoly and Battleship will get apps or other electronic
features added to them to capture more interest from today's
online-focused consumers. And Hasbro aims to move in the opposite
direction as well, with plans to launch web-based games that can
eventually morph into traditional "analog" board games.
In recent years, it appeared as if Hasbro was oblivious to the
tectonic shift taking place from board games to online games. As
management noted repeatedly at the Toy Fair meeting, all that has
There are two other issues that you need to monitor if you followed
along with my recent move to buy
. First, Hasbro's impressive international sales gains have been
offset by very low growth in North America. Hasbro has just
installed a fresh North American management team and is stepping up
marketing spending to support their initiatives. Signs of resurgent
U.S. growth would be a clearcatalyst for this stock.
Investors also need to keep an eye out for movie box office trends.
Hasbro stands to benefit from five major movie releases this year,
including The Avengers (May 4), a G.I. Joe sequel (June 29), Star
Wars in 3D (Feb. 10), Battleship (May 18) and the next installment
of the Spider-Man franchise (July 3). Beyond 2012: Stretch
Armstrong, Candyland and other titles are in development as well.
These movies promise to breathe new life into sales of key
characters, as was the case with the Transformers series, which
added hundreds of millions to Hasbro's coffers.
To be clear, these are all long-term initiatives, and investors
won't see much of an impact in the current quarter of the next
quarter. As noted, I think Hasbro is positioned to boost sales at
twice or three times the pace of that piddling 2% 2012 sales growth
forecast. But that upside is only likely to come in the second half
of the year, which is when Hasbro typically derives roughly 75% of
Yet it's the view into 2013 that has me focused on this stock. From
movies to digital extensions of popular games to merchandising
efforts associated with The Hub, Hasbro has so many drivers to
growth that you can expect analysts to slowly start boosting their
2013 forecasts later this year. By that logic, shares may progress
only a little bit in coming months, with more of acceleration later
this year. I still see this stock moving to $45 or $50 by the end
of the year (the stock currently sits near $37), which works out to
be 12-14 times projected 2013EPS forecasts of around $3.75 a share.
That figure represents the high end of the current consensus range,
but appears quite attainable as long as the U.S.
stays on its feet in coming quarters.
Risks to Consider:
Hasbro's shares lack near-term catalysts, and after seeing a
15% spike since the start of 2012, some investors may look to book
Action to Take -->
I retain a modest 100 share position (which is worth roughly
$3,600), and I hope to add to that position either on pullbacks or
as we get closer to the inflection point in sentiment that I
anticipate coming later this spring or summer.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of HAS in one or more if its "real money" portfolios.
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