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No. of Recommendations: 2
HAS Q209 Review & Analysis

Recent Price: $26.49

Issue Recommended: May, 2003
Recommended Price: $14.56 (+81.87%)

13-Week Trading Range (Mar 30-Jun 28):
Low: $22.27 (5/21)
High: $29.23 (4/20)
TTM EPS: $1.91
PE Range MRQ: 11.72-15.38

Current PE Ratio: 13.80
Div/Yield: $0.80/3.10%
Subsequent Recommendation: None

Q209 Financial Highlights
Revenues. $792.2 million, up 1% from $784.3 million. Up 7% absent impact of currency exchange rates of $44.5 million
Earnings. $39.3 million, up 4.8% from $37.5 million
EPS. $0.26, up 4.0% from $0.25
Enterprise Value. $4m458.9 million
Cash & Equiv. $392.0 million
Shares Outstanding. 153.0 million
Share Buybacks. None
Cash per Share. $2.56
Free Cash Flow (OCF-CapEx). No CF Statement Available
Debt. $1,134.7 million
Days Sales Outstanding. 74 days, up from 65 days because of timing issues

Q209 Notes
The theatrical release of Transformers: Revenge of the Fallen was a record-breaking global success, reaching a box office total of $762 million globally after just 26 days. In comparison, the first film’s total box office receipts were $707 million.

According to, it's now exceeded more than $791 million and became the highest grossing film ever in China in just 19 screening days. Transformers has more than 250 licensees.

After the 2007 release of the original Transformers movie, the strongest revenue contributions occurred in the third and fourth quarters. Considering the very strong second quarter, Hasbro expects to see similar results this year.

Product went on shelf about a week ago for the August 7th release of G.I. Joe The Rise of Cobra. It has 100 licensees.

They also have a full slate of Hasbro-branded games planned for all major platforms through its partnership with Electronic Arts, Activision, and Glu Mobile. Electronic Arts has released nearly 40 Hasbro-inspired titles across 16 brands and 13 platforms in the past 18 months. And Glu Mobile had the biggest launch in its history with the release of Transformers games for a variety of mobile devices, as well as a mini-application for the iPhone.

Shout Factory re-released the original Transformers animated TV series from 1984 on DVD. Hasbro saw exceptional results, selling over 100,000 units of the Transformers first three DVD box sets in four weeks in North America. This looks like it will be a property that keeps on giving.

Hasbro has developed an "anytime, anywhere" strategy where consumers can access a company-branded property through a variety of media. The new Discovery Communications TV program is an extension of that experience. Romper Room, Trivial Pursuit, Scrabble, Cranium, My Little Pony, G.I. Joe, Game of Life, Tonka, and Transformers will be part of the effort, but they've already signed their first new program for the network, WotWots from Weta Workshops, a supposedly popular preschool program that is airing in New Zealand, Australia, and the U.K. Weta Workshops were the magicians behind the Lord of the Rings trilogy movies.

They have two product lines for two major films coming out soon, Iron Man 2 from Marvel and Toy Story 3 from Disney. TS3 will be released June 2010.

U.S. and Canada revenues grew 5%, operating profits 9%, due to increased volumes

International revenues down 6%, but up 9% without the effect of currency translation. Operating profits improved 18%.

They've added a new segment that it's calling Entertainment & Licensing, which will cover lifestyle licensing, digital gaming, movie, online entertainment, and television, which includes the joint venture and its virtual studio costs.

Net revenues in the entertainment and licensing segment were $24.2 million compared to $21.3 million a year ago. The entertainment and licensing segment reported operating profit of $2.9 million compared to $8 million last year. The decrease is due to one-time advisory fees and deal costs associated with its investment in the joint venture.

They raised $425 million through a debt offering. However, in the second quarter they spent $300 million for Discovery TV venture while spending $135 million over the past year to pay down maturing debt. They also paid $95 million to extend their agreements with Marvel and Lucas Films, which they did for two years.

Movie lineup - 2010: Iron Man 2, Toy Story 3, Mr. & Mrs. Potato Head
2011 - April, Stretch Armstrong; May, Spider-Man; then Thor, and Captain America

Universal - Made "great progress" on Candyland, Monopoly, Battleship, and Clue.

Retailers want a sure thing in terms of allocating shelf space for toys and Hasbro apparently has the closest thing in their lineup. They expect to gain even more shelf space this year even though some retailers have cut back, because the cuts will fall disproportionately on smaller toymakers who don't have the same depth of brand as Hasbro does.

Q209 Financial Data
            Revenues                        EPS
-------------------------- -------------------------
2009 2008 2007 2009 2008 2007
---- ---- ---- ---- ---- ----
Q1 621.3 704.2 625.3 Q1 0.14 0.25 0.19
Q2 792.2 784.3 691.4 Q2 0.26 0.25 0.03
Q3 NA 1302.0 1223.0 Q3 NA 0.89 0.95
Q4 NA 1231.1 1297.8 Q4 NA 0.62 0.84
------ ------ ------ ---- ---- ----
Ttl 1413.5 4021.5 3837.6 0.40 2.01 2.01

Margins Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross 50.4 51.8 47.8 49.5 52.0 53.2 49.9 49.8 51.4
Op. 9.2 9.8 13.9 18.1 11.0 11.3 16.5 18.6 10.6
Net 5.0 3.2 7.6 10.6 4.8 5.3 10.3 13.2 0.7
*Gross margins include royalties in COGS which HAS does not similarly calculate

Range Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
------- ---- ---- ---- ---- ---- ---- ---- ---- ----
High 29.23 29.91 29.06 41.68 39.63 29.07 30.68 33.49 33.43
Low 22.27 21.14 22.27 33.23 27.73 21.57 25.25 25.25 28.10

PE Range Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
-------- ---- ---- ---- ---- ---- ---- ---- ---- ----
High 15.38 14.96 13.03 17.89 19.24 14.76 17.24 22.63 22.14
Low 11.72 10.57 9.99 14.26 13.46 10.95 14.19 17.06 18.61

FCF Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
--- ---- ---- ---- ---- ---- ---- ---- ---- ----
TFCF* NA 268.5 440.9 433.2 457.1 572.8 480.9 347.4 318.2
SFCF NA 259.9 277.6 320.2 350.5 327.9 330.3 295.7 227.1
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Inc 290.8 289.0 306.8 346.9 370.3 337.6 333.0 307.6 245.6

* True FCF = OCF-CapEx-Stock-Based Compensation Benefits
* Structural FCF = Net Income+Dep/Amort-CapEx
All figures are TTM

FCF/Sh Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
TFCF NA $1.75 $2.87 $2.77 $2.95 $3.67 $2.99 $2.03 $1.93
SFCF NA $1.70 $1.81 $2.05 $2.26 $2.10 $2.05 $1.73 $1.38
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
LTM EPS $1.92 $1.90 $2.00 $2.23 $2.33 $2.06 $1.97 $1.78 $1.48

EV/FCF Q209 Q109 Q408 Q308 Q208 Q108 Q407 Q307 Q207
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
TFCF NA 13.3 10.5 12.1 11.2 7.1 8.7 13.1 16.1
SFCF NA 13.8 16.7 16.4 14.7 12.4 12.7 15.4 22.6

Analyst Estimates
       EPS     Revenue      vs.         EPS     Revenues
-------------------------- --------------------------
Q309: $0.93 $1.33 billion Q308: $0.89 $1.30 billion
Q409: $0.78 $1.31 billion Q408: $0.62 $1.23 billion
FY09: $2.11 $4.05 billion FY08: $2.00 $4.02 billion
FY10: $2.16 $4.08 billion FY09: $2.11 $4.05 billion

Last quarter I once again thought a share price in the low $20s was a good place to begin acquiring shares and the market did give us those better entry points as it drove the stock down to about $22 a share even if it didn't quite touch the $21 upper limit I had suggested. It's once again in the $26 are now, so let's see what our crystal ball gives us this time out.

Forecast Target Year Sales
Analysts are still forecasting 9% long-term growth, but I prefer to stay on the conservative side. Last quarter I upped my target growth rate to 6% for three years on the strength of its movie line up and I'd be willing to stick with that now.

Trailing revenues are $3.95 billion, which is still below the $4.02 billion it ended last year with. Considering the success of the Transformers movie so far and the prospect of Q3 and Q4 being exception quarters, Ill again use that as our base to begin with. So at 6% annual growth we again end up with $4.79 billion in 2011.

Estimate Net Profit Margin
I'll keep Hasbro's net margins at the 7% level we used last time even though the company says commodity costs have been fairly stable so far.

Compute Net Income
We multiply our estimated revenues of $4.79 billion by our 7% NPM and we get net income of $335.3 million.

Estimates Shares Outstanding
We used a 3% antidilution rate last time which is below Hasbro's 5% historical average because, as the second quarter showed, they once again didn't buyback any shares.

The latest 10-Q showed Hasbro still had 153 million shares outstanding so when we factor in our share reduction we get estimated shares outstanding of 139.6 million shares.

Convert to EPS
We then divide net income of $335.3 million by 139.6 million shares outstanding and calculate estimated earnings of $2.40 per share.

Estimate PE Range
Hasbro still trades below its historical average and since the recession began in earnest in the third quarter of 2008 when the financial markets collapsed, it has basically been banging up against the mid-teen range for its upper level multiple. I'll only move our PE range up incrementally to between 16 and 21, because of the expected contribution Transformers will provide and the expectation that the market will want to pay a slightly higher multiple for the earnings that will be generated. Again, that allows for growth just not as much during the bull market years.

Compute Target Price Range
To calculate a price range, we multiply our estimated EPS of $2.40 by our PE range of 16-21 and we obtain the following:

$2.40 x 16 = $38.40
$2.40 x 21 = $50.40

I take an average of our prices and get $44 three years out. As usual, I also suggest a 50%-55% buy-in discount which means you'd want to buy Hasbro in the $22-$24 range. At $26 a share, it's again just a little higher than I would like though picking up shares here would be perfectly reasonable. Splitting hairs -- or pennies -- isn't required, but it is always possible that the market that will give us a 10% price cut, which would be equal to the upper levels of the suggested buy-in price.

There was a good quote that Brian Goldner made towards the end of the conference. He was going over how over the past few years after they would put up good numbers because this movie or that came out that the following year their earnings wouldn't be any good. Yet each time they surpassed expectations only to hear the same thing again.

"People have to understand that our business is much broader than just the entertainment initiatives. We’ve been growing our girls business, we’ve been growing our preschool business and we are expanding geographically. And we are growing our income from other sources like EA and other licensees. So I think people shouldn’t just focus on the entertainment area."

Hasbro's entertainment business does indeed draw a lot of attention, and rightly so, because it puts so many tentacles out into other areas of the company. But it is more than just that and though My Littlest Pet Shop gets buried beneath the mountain of attention heaped on Transformers and Nerf's international expansion loses out to Iron Man-ia (ahem!) these are lucrative lines in their own right and will continue to provide the support for the main attractions.

Coverage Fool

Related Links
Q209 Conference Call Transcript
Q109 Review & Analysis
Q408 Review & Analysis
Q208 Review & Analysis
Q108 Review & Analysis
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