It's All About the Brands
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I remember not too long ago when Walt Disney (NYSE: DIS) acquired Marvel, that the rumors surrounding both Mattel (NASDAQ: MAT) and Hasbro (NASDAQ: HAS) started to circulate. The theory was that both companies had attractive brands that a larger entertainment company could use to promote movies, toys, and games. While this is true to an extent, neither Mattel nor Hasbro has the number of movie-ready characters that Marvel did. That being said, it seems to make more sense to look at these companies as stand-alone investments, as opposed to takeover candidates. With Hasbro recently reporting earnings, we get a chance to see how well the company can do standing on its own.
At this point, investing in Hasbro is somewhat of a waiting game. The company acknowledged this by saying that they are “shifting more of our shipments to later in the year.” This makes good sense, as the holiday season is when the company makes the majority of its money. For this reason, revenues decreasing 7%, with flat earnings per share is not as much of a concern as it would be otherwise. What is a bit of a concern is the lack of movie type brands in the Hasbro's stable.
Hasbro's two primary brands that lend themselves to movies are: Transformers and G.I. Joe. With multiple successful Transformers movies already made, and the newest G.I. Joe movie preparing to be released in 2013, the company is trying to capitalize on these two movie-ready brands. The challenge is after these two brands, there really isn't anything that the company can license to a studio on an ongoing basis. While the Battleship franchise was recently made into a movie, it underperformed expectations, and many reviewers on a 10 point scale gave it a score of less than 5. It's critically important that Hasbro take advantage of any licensing agreements that they can. Looking at the company's most recent quarterly report, this division was a huge positive in an otherwise lackluster report. With revenues up 59% and operating profit up over 1,200%, these are more one time hits than ongoing earnings. With consistent earnings generation a question in the entertainment division, the company's other divisions are certainly not helping matters.
In the more traditional toy and board game part of the business, United States revenues were down 19%, but operating profit actually increased 6%. International sales were down 4%, and operating profit dropped even more with a 12% decrease. Even with these uninspiring results, the company's financials look pretty good.
Because one of the primary reasons investors give for buying either Hasbro or Mattel are their dividend yields, it's important that the company's financials hold up. Hasbro did what it could to help its earnings-per-share results by repurchasing 139,734 shares for a total price of $4.9 million during the quarter. Even with the share repurchases, long-term debt dropped slightly, and cash on hand actually increased by over 30%. The company's free cash flow of about $150 million was more than enough to cover the company's $85 million worth of quarterly dividends. This 56% payout ratio should give investors some confidence in the company's over 4% yield.
Looking at the company's competition, we've already mentioned Mattel, but Disney represents direct competition as well. All three companies compete for consumers' dollars in the toy and games industry. Of the three companies, Disney is the most diversified, has the strongest financials, and the greatest name recognition. With multiple hit movies expected to be released between 2012 and 2013, Disney should benefit from the strong release schedule and a slowly improving economy. Analysts seem to agree, and expect Walt Disney to grow earnings per share by nearly 13% in the next several years. While the company's dividend yield of 1.2% cannot compete with Mattel at 3.6%, or Hasbro at 4%+, the higher growth rate may be more important to investors. Where Mattel is concerned, the company owns the rights to produce toys and games related to multiple hit movies and TV shows. Specifically, the company produces toys related to Toy Story, Batman, Thomas and Friend's, Dora the Explorer and others. With multiple kid friendly name brands, Mattel has an attractive stable of options for the upcoming holiday season. However, Mattel has the same problem that affects Hasbro, and that is that the company does not have many brands that it owns outright worthy of licensing for movie production. In addition, while Hasbro and Mattel both are expected to grow at about the same rate, Mattel's free cash flow payout ratio is higher at almost 79%. For investors looking for more of a pure play on the toy industry, Hasbro seems to be the better of the two options.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney, Hasbro, and Mattel. Motley Fool newsletter services recommend Hasbro, Mattel, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.