Commentary

Valuation: Hasbro Incorporated (HAS)

Company Profile:  Hasbro, Incorporated (CCU) (obtained via Google Finance)Hasbro, Inc. (Hasbro) is engaged in children’s and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys. The Company’s offerings encompass a variety of games, including traditional board, card, handheld electronic, trading card, roleplaying, plug and play and digital versatile disc (DVD) games, as well as electronic learning aids and puzzles. Toy offerings include boys’ action figures, vehicles and playsets, girls’ toys, electronic toys, plush products, preschool toys and infant products, children’s consumer electronics, electronic interactive products, creative play and toy-related specialty products. In addition, Hasbro licenses certain of its trademarks, characters and other property rights to third parties for use in connection with consumer promotions and for the sale of non-competing toys and games and non-toy products. The Company’s principal segments are North America and International.

Business and Management Review

1) Is the business simple and understandable?

Hasbro is a manufacturer of toys and board games.  The business itself is simple and understandable.  In addition, a number of the games are simple and understandable, though the simplicity of the games may not be a contributing factor to an investing decision. 

2) Does the business have a consistent operating history?

Hasbro was founded in 1923 as Hassenfeld Brothers as a textile and school supply company.  The company has slowly evolved to its current operations, having acquired related businesses such as Parker Brothers along the way.  While we now think of Hasbro as more of a toy and game company, it could be argued that the core operating strategy and target market has remained the same:  educational supplies and entertainment for youth.

3) Does the business have favorable long term prospects?

While more technologically advanced toys may become available by some competitors, it is likely that youth will remain interested in “old-school” toys for their ease of use and enjoyment factors.  At the same time, the company does develop technological toys along side the traditional ones.  As a result, the company’s long-term prospects are likely more tied to the long-term prospects of children’s interest in toys – a very favorable prospect indeed.

4) Is management rational?

We are encouraged by management’s constant refinement of the products provided while still remaining focused on the long-term operating strategy.  In addition, the company has pursued acquisitions only when they are related companies.  Such a strategy allows the company to grow market share and profit on economies of scale while allowing the individual investor to do the majority of diversification (it is cheaper for the shareholder to diversify than for the business).

5) Is management candid with its shareholders?

The company’s investor relations page is rather standard, though we are drawn more to it than others due to Mr. Potato Head’s likeness. 

6) Does management resist the institutional imperative?

We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

Defensive:

1) Size of firm

The market cap of Hasbro is $4.81 billion.  Pass.

2) Strong financial condition

The company’s current ratio is about 1.96, just below the 2.0 requirement.  Fail.

3) Earnings stability

The company has not had a consistent positive net income for over 10 years.  Fail.

4) Dividend record

Hasbro has consistently paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have not grown more than 1/3 over the last 10 years.  Fail.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 27.10, the requirement of under 20 is not met.   Fail.

7) Price to assets analysis

The Price to Book ratio for Hasbro is 3.38, higher than our 2.5 limit.  The multiple of PE to PB is higher than our requirement of 50.  Fail.

Overall

Having passed only 2 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Hasbro is suitable for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is above 1.5 and debt to net current assets is below than 1.1.  Pass.

2) Earnings stability

The company has achieved a positive net income for over 5 years.  Pass.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail.

Overall

We find the company to be potentially suitable for the enterprising investor, having passed 4 out of 5 tests.

Valuation:

Our valuation model finds a fair value to be around $20. 

Opinion:

Since the company is currently trading at about $29, we feel it is overvalued at the present time but could potentially be a good investment for the Enterprising Investor if the price drops to closer to the fair value.

None of the staff of ModernGraham.com held a position in Hasbro at the time of publication.  Also, please read our disclaimer and Our Methods.

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