Earnings Preview: Hasbro (HAS)

Hasbro (HAS), engaged in the design, manufacture and marketing of games and toys is slated to release its second-quarter 2010 results on Monday, July 19. The current Zacks Consensus Estimate for the second quarter is 24 cents per share, representing an annualized decline of 6.5%.

With respect to earnings surprises, over the trailing four quarters, Hasbro has outperformed the Zacks Consensus Estimate in all the quarters. The average earnings surprise was a positive 29.4%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

Hasbro reported first quarter earnings of 40 cents per share. Excluding a favorable tax adjustment, the company reported earnings of 26 cents per share. The results were well ahead of the Zacks Consensus Estimate of 16 cents per share.

The better-than-expected results were driven by a strong demand for its product lines and revival in consumer spending enabled by a slow recovery in the economy.

Net revenues for the quarter increased 8% to $672.4 million from the prior-year quarter. Excluding the positive impact of foreign exchange, revenues were up 5% in the quarter. Operating profit was $69.3 million, up 68.2% year over year. Operating margin increased 370 basis points from the prior-year period to 10.3%.

Hasbro experienced growth across major product categories. The Boys category increased 3% year over year, the Games and Puzzles category grew 7%, Girls category was up 16% and Preschool category leaped 18%.

The U.S. and Canada segment’s net revenues were up 5% year over year and International segment revenue spiked 17%. However, Entertainment and Licensing segment experienced a decrease of 7.7% due to lower licensing revenue in digital gaming.

Outlook

Management expects revenues and earnings to grow sequentially in fiscal 2010, despite dilution from the joint venture with Discovery Communication. However, growth is likely to be back half loaded, given the comparison against the sale of Transformers 2 and GI Joe products in the first half of 2009.

Estimates Revisions Trend

Estimates have moved down in the last 7 days, implying that the analysts see negative catalysts for the time being. The current Zacks Consensus Estimate is $2.59 for 2010, reflecting a year-over-year growth of 4.5% and $3.06 for 2011, reflecting a year-over-year growth of 18.3%.

Agreement of Estimate Revisions

In the last 30 days, out of 13 analysts covering the stock, one analyst increased the estimate for both the second quarter and fiscal 2010 and one reduced the estimates, thus providing no directional movement. Out of the 14 analysts, one covering the stock slashed its estimates for fiscal 2011. One analyst has reduced its estimates based on increasing input costs and the adverse impact of a weak euro.

Magnitude of Estimate Revisions

In the last 60 days, there has been no change in the earnings estimate of 24 cents for the second quarter, as seen from the magnitude of the Consensus Estimate trend. Therefore, the analysts expect the company to report in line.

Following the first-quarter earnings release, estimates for 2010 and 2011 improved to $2.59 and $3.07 from the previous estimates of $2.48 and $2.99, respectively. The analysts have based their upward revision on improvements in business trends, strong first quarter 2010 results and positive impact from the Hub cable TV joint venture.

For fiscal 2010, in the past 30 days’ earnings estimate was raised to $2.60, but in the last 7 days it was reduced to $2.59 due to tough comparisons in 2010, increasing input costs and adverse impact of a weak euro. For fiscal 2011, in the past 30 days, the earnings estimate was raised to $3.08, but in the last 7 days it has reduced to $3.06.

Maintain Neutral Rating

Hasbro’s strong product line-up for fiscal 2011, strategic association with Discovery, Universal Pictures and Electronic Arts and aggressive tapping of the Latin American market augur well. The company’s expense management efforts also bode well. However, we remain cautious on the stock due to the execution risk surrounding the joint venture with Discovery Communication and its dilutive effect on near-term earnings, tough comparisons in 2010, increasing input costs and adverse impact of a weak euro. We have a Neutral rating on the company.

Hasbro’s primary competitors in the toys and games market include JAKKS Pacific Inc. (JAKK) and Mattel Inc. (MAT).

HASBRO INC (HAS): Free Stock Analysis Report
MATTEL INC (MAT): Free Stock Analysis Report
JAKKS PACIFIC (JAKK): Free Stock Analysis Report
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