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Hasbro Downgraded to Neutral

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We recently downgraded our rating for Hasbro Inc. (HAS - Free Report) from Outperform to Neutral, primarily due to a host of factors including execution risk around the joint venture with Discovery Communication (HUB) and its dilutive effect on near-term earnings, tough comparisons in 2010, increasing input costs and the adverse impact of a weakening euro. 

First-Quarter Results Ahead of Estimates 

Hasbro’s first-quarter adjusted operating earnings of 26 cents per share were ahead of the Zacks Consensus Estimate of 16 cents per share. Including a favorable tax adjustment, its first-quarter earnings were 40 cents per share. 

Net revenues in 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 margin increased 370 basis points from the prior-year period to 10.3%. Total EBITDA increased 36.6% to $100.3 million. 

Quarterly earnings for Hasbro, which is engaged in the design, manufacture and marketing of games and toys, benefited mainly from strong demand for its product lines and revival in consumer spending in the wake of this slow economic recovery.
Outlook for 2010 

Management expects fiscal 2010 revenue and earnings to grow sequentially. 

Downgraded to Neutral 

We believe Hasbro’s ability to deliver growth in both revenue and earnings per share depends upon its broad-based strength across its core brand product portfolio and strong execution globally. Its strong product line-up, strategic association with Discovery, Universal Pictures and Electronic Arts, and aggressive tapping of the Latin American market holds promise for investors. 

Although we believe Hasbro is well positioned to improve its fundamentals with decent long-term sales growth prospects, tough comparisons in 2010 may be a drag on the stock. Although two movies are slated for release in 2010, it would be difficult for Hasbro to outperform its achievement in 2009 that included the release of Transformers 2, GI Joe, and Wolverine. 

Hasbro will likely face foreign currency headwinds during the second quarter of 2010, primarily due to a weakening euro. Additionally, Hasbro’s recent joint venture with Discovery Communication is expected to be $0.25 to $0.30 dilutive to earnings in fiscal 2010, owing to the costs incurred related to re-branding and re-launching the network along with marketing and advisory fees. The company does not expect the initiatives to be accretive before fiscal 2011. Hence, we expect the launch of HUB to remain a drag on Hasbro’s earnings in the near term. Hence, we downgrade the stock from Outperform to Neutral. 

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