Better Times Are Ahead For This Company

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Certain industries are so reliant on one season of the year that they either have a good or bad year depending on what happens during that timeframe. When you think about florists, snowplow operators, Christmas tree sales lots, and the like, if they don't make money in their prime season, their whole year could be shot. There is another industry that works in similar fashion and that is the toy business. The two big toy companies Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT) both delay much of their investments until the third and fourth quarter of the year. Walt Disney (NYSE: DIS) is another major player through their licensing deals of their multiple toy brands. Hasbro is a company I've written about before, and I honestly believe the company's mix of company owned brands and strong licensing deals makes this the premier toy and game company. Looking at the company's last earnings report might not make investors a believer, but just wait until next year.

A Huge Brand Catalog, But There Is An Increasing Push Toward Technology:

Hasbro owns the rights to some of the most famous names in the toy and games business. With brands ranging from Easy-Bake and Twister, to My Little Pony and Transformers, there is really something for everyone. Their competitor Mattel also owns some strong brands like American Girl and Hot Wheels, and Mattel has the advantage of licensing names like WWE, Mickey Mouse, and others. Walt Disney plays both sides of the fence by letting Mattel produce Disney Classics and the aforementioned Mickey Mouse, but Hasbro has the rights to the Marvel lineup. While it sounds like each company would benefit from strong sales during the holiday season, there is a trend away from traditional toys and games. This is probably the biggest challenge facing each of these companies. For instance, my almost four year old loves to play on my wife's iPad. He can do nearly everything on the device himself, and apps and movies for him dominate her device. So naturally along with the play castle he wanted and some other things, do you know what we considered...? an iPad or some other tablet just for him. Though these devices are generally more expensive than traditional toys, when you think about the hours of enjoyment kids get out of technology, it's a harder argument to make that this would be a waste of money. That being said, some of the most long standing toy brands are still performing well, and Hasbro is showing strength in brands that you would think have seen better days.

Last Quarter's Results And Why Holiday Sales Should Increase:

The company saw weakness in its Boys division from a lower interest level in Transformers, even though the Marvel related toys saw strong growth. When it comes to games, Hasbro really is the king of diversity with Twister showing strong sales right along with Angry Birds and Star Wars toys launching during the quarter. One of the strengths in the quarter was the launch of the new Furby lineup as well as One Direction figures. If you know anything about girls, if they aren't in love with Furby, just ask them about Harry, Louis, Niall, Zayn, or Liam (One Direction's members). I'll warn you if you begin a conversation about One Direction though you might want to sit down and take some time. The point is, whether it's selling an Easy-Bake oven or a Furby, Hasbro has a solid lineup of toys for the holidays.

3 Positive Signs For Investors:

While all of this information about the company and its brands is well and good, I'm sure investors are wondering why buy Hasbro stock? I'll admit the stock has been treading water for a while. In fact, since January, shares are essentially flat. While it's true the company pays a yield of about 3.8%, most investors are probably looking for more than just a good dividend. Well I've found at least three different reasons investors should be excited about the company's prospects in the future.

First, Hasbro is committed to buying back shares. The company repurchased another $5.2 million worth of shares in the last three months at an average price of $36.18. For all the talk about company's wasting money on share repurchases, Hasbro is lowering its share count while the stock price has stagnated. In theory, if the company can capitalize on its opportunities going forward, investors should see even better returns.

Second, the company's operating margin is lower than either of its two competitors. Wait...isn't that supposed to be a bad thing? It would be except it proves that Hasbro can improve its operations to generate better income and cash flow. Hasbro's operating margin was 18.6% in the last three months. Mattel, which is Hasbro's most direct competitor, shows a margin of 23.46%. Even Disney shows a higher operating margin at 18.83%. If Disney with its theme parks, television channels, cruise lines, and other properties can turn in a better margin than Hasbro, clearly the company can become more efficient.

Last, Hasbro pays the highest dividend of the bunch and it's well covered. I've already mentioned the 3.8% yield the stock carries, but what I didn't mention is the company's adjusted free cash flow payout ratio is just 46.72%. Mattel shows a good yield of 3.3%, and it's true that company's payout ratio is just 29.56%, but Mattel doesn't have the breadth of brands that Hasbro possesses. Disney recently raised their dividend significantly, but even after this increase the yield is just 1.51%. In addition, Disney's payout ratio is higher than their peers at 55.13%.

Conclusion:

The bottom line is, Hasbro has a great catalog of brands and we are in the most important time of the year for the company. Hasbro pays the highest yield, the dividend is well covered, and though the company isn't expected to grow as fast as Mattel or Disney, I believe they may surprise the analysts. Next year has multiple big releases from the Marvel Avengers lineup that will benefit both Disney and Hasbro. If investors look to 2014, Transformers 4 is slated to be released and the addition of Mark Wahlberg to that franchise should give a big boost again to sales of this key product. The volatility in the stock gives investors a chance to reinvest their dividends at lower prices and wait for better times ahead.


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 Walt Disney, Hasbro, and Mattel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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