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Bear of the Day: Hasbro (HAS)

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Despite selling on Friday, stocks posted a better stretch last week as investors looked to rebound from a largely brutal October. If a bottom has been found, major indexes could be in store for solid gains to finish the year. Nevertheless, companies with slumping earnings outlooks and questionable valuations should still be avoided.

Toymaker Hasbro (HAS - Free Report) looks to be one such stock. Hasbro makes toys, games, and various other entertainment products, and it certainly has an impressive portfolio of brands. From Nerf and Monopoly to Transformers and many popular licensed products, there is no doubt that Hasbro is a heavyweight in the toy industry.

But unfortunately, the company has hit a rough patch and does not look like a viable investment right now. We should start with its latest earnings report, which was delivered just two weeks ago.

Hasbro reported poor Q3 earnings, missing Zacks Consensus Estimates on both the top and bottom lines. Earnings of $1.93 per share lagged the consensus by more than 30 cents and slumped 8% from the year-ago period, while revenues fell 12% to touch just $1.57 billion. Analysts were looking for $1.71 billion in revenue from the company.

The toymaker has struggled since the liquidation of Toys “R” Us, and it has apparently not found a suitable replacement to that key retailer. Hasbro’s balance sheet has also suffered recently, with cash and cash equivalents slumping to $907 million from the $1.24 billion it has last year around this time. The company is now facing long-term debt of $1.69 billion.

Hasbro’s poor quarter led to swift and noticeable adjustment to its earnings outlook for upcoming periods, as analysts were quick to revise their estimates to the downside:

One of the biggest issues here is that there is a universally negative consensus about Hasbro’s outlook for the holiday quarter, which is a vital period for the company. But overall, the magnitude of these revisions is troubling for all upcoming quarters.

Perhaps more troubling, however, is the stock’s current valuation. HAS is sporting an “F” grade in the Value category of our Style Scores system, and nearly all of its key value metrics look stretched. For instance, its PEG ratio of 1.9 is a premium to its industry’s average of 1.7, and its P/B ratio of 6.6 is an even more noticeable premium to the industry’s 5.7.

Here’s a look at how the stock is trading based on its forward 12-month earnings:

So technically you could get HAS at a discount to its peer group in terms of its forward earnings multiple. However, 19.7x still feels expensive for a stock with the aforementioned earnings outlook and balance sheet, and the valuation has hardly pulled back at all recently.

My ultimate conclusion here is simple: why overpay for a struggling company that analysts clearly do not view favorably right now?

Instead, stick to the companies that are actually expected to have a strong holiday quarter. Opt for a retailer like Best Buy (BBY - Free Report) , today’s Bull of the Day, or a surging apparel company, like Deckers Outdoor (DECK - Free Report) .

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Hasbro, Inc. (HAS) - free report >>

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