Thursday, January 19, 2012

Hasbro (HAS): Part One - My Intro to the Toy Industry

Flipping through some 52-week low stock screens I run across Hasbro (HAS), see its relatively low P/E at 11, its comfortable dividend yield at 3.6 percent, and decide to dig in for a closer look. Here's a first blush check list that tells me its worthy of investing some time...

1. 10-year historical information at Morningstar shows decent performance in revenue growth and operating income while maintaining a respectable return on invested capital and a much better return on equity.

2. A glance at its balance sheet shows growing debt levels but the cash flows show no problem covering interest payments. 

3. Its statement of cash flows demonstrates a commitment to returning cash to investors in the form of consistent and growing dividend payments along with plenty of share repurchases over the past several years. Its need for capex is pretty low when compared to its cash generating abilities.

4. And finally, its website shows that it owns and/or licenses some real franchise brands like Transformers, G.I. Joe, Star Wars, Nerf, Monopoly, etc. I like strong brands. 

This looks promising, but I know almost nothing about the toy industry. I need to educate myself. Strangely enough, one of the first places I end up spending time is the investor relations page of arch rival Mattel where I start reading its Analyst Day presentation from October 2011 which attempts to answer these three questions: Why toys? Why Mattel? and Why now?

Seems a good place to start.

Mattel management presents a reasonable thesis that appears grounded in facts. Here are the key points:

  • The global toy market is growing, sporting a respectable 2.1 percent CAGR since 2007 despite strikes, recessions and epidemics and showing no reason it would slow down soon.
  • There are more kids today then ever before, and mothers keep popping 'em out.
  • Grandparents are growing as a demographic, and they spend $52 billion a year on their grandkids in the U.S. alone. As true a fact as you'll ever read...Grandparents are the biggest suckers the toy industry could ever hope for!
  • The middle class is growing like crazy in developing countries and more disposable income creates the desire to spoil your kids with brand-named toys.
  • The toy industry is largely recession resistant, actually growing during the 2001-2003 recession and doing five percent better than the rest of the S&P 500 during the 2008-2009 recession. Not to mention toys outperformed most other forms of discretionary consumer spending when things got tight for shoppers.


The gist of the rest...Mattel is very shareholder friendly with its cash, has incredible toy brands along with strong licensing partners, and it's poised to knock the proverbial ball out of the proverbial park as consumer wallets start opening up again.

Few senior executives make it to their high-salaried positions without honing some sales skills along the way. And as I finished listening to the Mattel presentation, I was ready to speed-dial my broker and grab me a slice of that pie. I like good brands! I like demographic tailwinds! I like global growth! I like shareholder friendly management!

Alas, it was trading at a premium to Hasbro (14x to 11x) and was much nearer to a 52-week high than Hasbro's low. Plus, I have a hard and fast rule about making impulsive investment decisions. I set out to evaluate Hasbro and the toy industry. Let's just digest this information for a night and see where our efforts lead us tomorrow.

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