Benefit From This Toy Giant's Continued Digital Push
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hasbro (NASDAQ: HAS) just inked a deal to buy 70% of casual game maker Backflip Studios. This fits nicely with the company's goals of creating broad identities around its impressive portfolio of brands. This should help boost performance over time at the number two toy maker.
Doing More with its Toys
Hasbro has taken a fairly aggressive stance in its brand development efforts in recent years. For example, while toy sales remain the core of the business, it has been creating content based on brands like My Little Pony and Pound Puppies through a joint venture with Discovery Communications (NASDAQ: DISCA) called Hub. That content has also found its way to online distribution partners like Netflix.
Getting kids to fall in love with the toys through what amounts to half hour long commercials isn't the only approach Hasbro is taking. It's also creating movies, for the big screen and for the direct to video market, and video games. That latter area was materially bolstered by the planned $112 million purchase of a controlling stake in Backflip.
Backflip will continue as an independent company making its own titles, but it will also start to work on games for Apple and Google Android based phones and tablets. The backlog of great brands is nothing short of impressive. Toy based games are one thing, but Hasbro is one of the largest makers of board games and card games. More aggressive use of high profile games like Monopoly, Clue, Candyland, and Risk could really push sales in a crowded field without many brand names.
Not the Best Results
Hasbro's sales, though, haven't really gone anywhere for the past five years, hovering around the $4 billion mark. There was a brief pop in 2011, when sales spiked to nearly $4.3 billion, but they dropped back to $4.1 billion last year. Earnings, meanwhile, are at about the same place they were around four years ago, coming in at $2.55 a share last year.
Profit margins have fallen in the last two years, but at around 13.5% are still a couple of percentage points above where they were a decade ago. That said, the trend here is still heading in the wrong direction.
Despite this somewhat anemic performance, the shares are near all time highs. The price to earnings ratio is about 18. Based on recent results, it's hard to call Hasbro a growth stock. However, the turnaround story here is pretty compelling and the addition of a solid social game maker only adds to the allure. The 3.4% dividend yield and a long history of regular dividend increases could interest more aggressive income seekers looking for a turnaround play.
Hasbro clearly needs to take aggressive steps to get the top- and bottom-lines heading in the right direction. That's compounded by the fact that it's about a third the size of Mattel (NASDAQ: MAT). And that's not the only difference. After dipping during the 2007 to 2009 recession, Mattel's top- and bottom-lines have since moved steadily higher. Moreover, its PE is around 18, in line with Hasbro's. An around 3.3% yield and a history of regular, though not annual, dividend hikes rounds out the picture.
For more conservative growth and income investors, Mattel is probably a more compelling option. The company's business has been performing better and has just as many, if not more, top brands. That includes such American icons as Barbie, Hot Wheels, and Fisher Price. Although the company hasn't been as aggressive as Hasbro, it clearly hasn't needed to be.
Another Way to Play
If the story behind Hasbro is enticing but the lack of revenue and earnings progress is a bit too concerning, you might consider Hub partner Discovery Communications. Although the company's PE is high at around 33, the bottom-line has gone from around $500 million a decade ago to almost $4.5 billion in 2012. That's growth worth paying a premium for.
The Hub, though, is only one small part of this content creator. In addition to its namesake cable channel, it also owns The Learning Channel and Animal Planet. Its focus is unique, creating a notable barrier to entry for competitors and highly valuable content that can be sold to Internet distributors. Though not cheap, growth investors should take a close look. The Hub relationship augments these already strong cable brands, as does a similar relationship with Oprah Winfrey's OWN channel.
An Expensive Turnaround
Hasbro looks like it is making the right moves to differentiate itself over the long term. However, investors have afforded the stock a high valuation based on recent lackluster performance. While more aggressive income investors seeking a turnaround play might consider it, growth and income investors should favor Mattel. If the Hasbro story is compelling, though, another way to tag along for growth investors is to buy media partner Discovery.
The future of television begins now… with an all-out $2.2 trillion media war that pits cable companies like Cox, Comcast, and Time Warner against technology giants like Apple, Google, and Netflix. The Motley Fool's shocking video presentation reveals the secret Steve Jobs took to his grave, and explains why the only real winners are these three lesser-known power players that film your favorite shows. Click here to watch today!
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. 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!