This Well-known Value Stock is Now About to Be a Growth Stock

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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 investors. Indeed, I added toy maker Hasbro ( HAS ) to my $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 direction.

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 changed.
 
There are two other issues that you need to monitor if you followed along with my recent move to buy shares . 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 profits anyway.

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. economy 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 profits.

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.

[ Note: Remember, my $100,000 Portfolio investments are being made available for free for a limited time only. Be sure to take advantage of this limited-time offer by having my latest analysis delivered to your email as soon as it's published. Go here to sign up .]


-- 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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: HAS , ZNGA

David Sterman

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