Hasbro, Inc. (HAS - Free Report) is currently one of the most rewarding stocks in the U.S. toy market. Despite the severe challenges posed by the Toys “R” Us liquidation, the company has been able to revive its sales through partnerships, product launches and using various distribution channels.
Further, among its prominent peers like Mattel (MAT - Free Report) and JAKKS Pacific (JAKK - Free Report) , Hasbro has been the first to gauge the disaster that the liquidation of Toys “R” Us brought. Evidently, Hasbro started testing waters with franchise partnerships and launch of digital games.
The company returned to profit in first-quarter 2019, after incurring losses in the trailing three quarters. Its shares have gained 30.2% so far this year, outperforming the industry’s 10% rally. Meanwhile, the company’s earnings estimates have been revised upward by 4.9% over the past two months, reflecting analysts’ confidence surrounding its earnings potential.
With a decent share price appreciation and a Zacks Rank #1 (Strong Buy), Hasbro is a lucrative choice at the moment. More so, as the company currently has a Momentum Score of B, which suggests that now is the right time to pick the stock.
Sales-Building Initiatives to Drive Top Line
Hasbro has a supreme gaming portfolio and it is refining gaming experiences across a multitude of platforms like face-to-face gaming, off-the-board gaming and digital gaming experiences in mobile. Robust performances of DUNGEONS and DRAGONS, JENGA, DUEL MASTER, and DON’T STEP IN IT bode well for the gaming category. Notably, gaming revenues increased in the International, and Entertainment and Licensing segments in the first quarter of 2019. Given a strong product lineup and a greater focus on entertainment backed products, Hasbro’s Entertainment and Licensing segment is poised for growth.
Meanwhile, the company continues to invest in innovation. It partnered with Paramount to enhance storytelling and content capabilities. Also, the company invested in Boulder Media — its animation studio — and increased digital capacities to drive sales. Hasbro continues to release Transformers Franchise in all forms of entertainment — including movies, television and digital expressions. Given the company’s several innovative and productive plans for Transformers franchise over the next 10 years, revenues are expected to grow.
On the product innovation front, Hasbro launched several social games. Among those, Dungeons & Dragons was particularly successful. With the launch of DROPMIX, the company further strengthened its digital gaming revenues.
Backed by these efforts, the Zacks Consensus Estimate for Hasbro’s revenues in 2019 is pegged at $5 billion, suggesting an 8.4% rise from the year-ago quarter’s reported figure.
Cost Containment Aids
In the first quarter of 2019, the company's cost of sales, as a percentage of net revenues, decreased 10 bps to 35.5%. Selling, distribution and administration expenses, as a percentage of net revenues, were 30.8%, marking a sharp decline from 45.8% in the prior-year quarter. The decrease in costs resulted from Hasbro’s various efforts to channelize its products in a cost-effective manner. Subsequently, the consensus estimate for the company’s earnings in 2019 is pegged at $4.53, indicating 17.7% growth from the prior-year quarter’s reported figure.
Undervalued Compared With Peers
Looking at Hasbro’s forward 12-month Price to Earnings (P/E) ratio, investors may be willing to pay more premium as the company seems undervalued compared with its peers. Its forward 12-month P/E is 22.1x, which is below the high of 23.1x scaled over the past five years. The industry’s ratio, on the contrary, stands at 25.9.
Growth in Emerging Markets Bodes Well
In addition to growing brands and leveraging opportunistic toy lines and licenses, Hasbro seeks to grow its international business by expanding into emerging markets in Eastern Europe, Asia, and Latin and South America. Emerging markets offer greater opportunities for revenue growth than developed markets and have been contributing to a significant share of Hasbro’s revenues, given its investments in advertising and other brand-building efforts.
In fact, despite difficult operating conditions in some key markets, Hasbro’s emerging brands’ revenues (excluding Fx impact) have increased consistently since 2012. In the first quarter of 2019, emerging brands’ revenues increased 22% year over year, following gain of 5% in fourth-quarter 2018. We expect the overall positive scenario to continue in 2019. Over the next few years, Hasbro expects emerging markets to grow in double digits, backed by innovation in products, entertainment and market share gains.
Other Key Picks
Another top-ranked stock in the industry is Electronic Arts (EA - Free Report) , currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Electronic Arts’ long-term earnings are likely to grow 16.5%.
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