Best Ideas Portfolio
You Must Be So Pleased!
publication date: Apr 20, 2015
author/source: Brian Nelson, CFA
Image Source: Gage Skidmore
We know it’s difficult for new members, especially those not following the newsletter portfolios directly, to read about the “story arc,” or the follow-ups on some of the ongoing ideas held within the newsletter portfolios. But Hasbro (HAS) is a rather unique case. For much of the past decade or so, the firm was simply written off as a physical toy company in a digital world. What we saw that others didn’t, however, was the firm’s lovable brand portfolio and the ongoing opportunity in its Entertainment and Licensing segment.
Though the first quarter is the least significant of the year, shares are surging yet again on its quarterly performance. Absent currency exchange fluctuations, revenue advanced an impressive 14% in the first quarter. Franchise Brand revenue jumped 20%, while the company’s Boys, Games and Preschool category revenues each increased in the period. Operating profit leapt 25%, while net earnings jumped more than 40% on an apples-to-apples basis relative to the same period a year ago. Management also noted underlying strength in demand across international markets. The company raked in $315 million in operating cash flow during the period, growing its end-of-period cash balance to $1.1 billion.
The story at Hasbro is not in physical toy sales, but in the rapid growth of its high-margin Entertainment and Licensing revenues. The segment’s sales advanced 74% while operating profit in the division nearly tripled, to $16.4 million, both measures on a year-over-year basis. The company’s Entertainment and Licensing business now accounts for nearly 30% of all of its operating profit, despite being a mere fraction of its overall revenue. Licensing revenues for MY LITTLE PONY and TRANSFORMERS were the primary drivers, though the multi-year digital streaming deal for Hasbro Studios has helped. Its first quarter performance was the best by far in years!
Though its Girls category wasn’t as strong as the others, Hasbro’s lucrative deal with Disney (DIS) should pave the way for sustainable growth in coming years. Disney’s Frozen has simply taken the doll market by storm, leaving executives behind Mattel’s (MAT) Barbie franchise questioning its relevancy for today’s youngest generation. Elsa and Anna, the two princesses starring in Disney’s blockbuster animated film, continue to be extremely popular, and Disney’s recent confirmation that there will be a Frozen 2 speaks to the ongoing enthusiasm. Even younger boys can’t wait for this release, with Hans, Kristoff, Olaf and Sven seconding as franchise favorites!
Followers of Valuentum’s Dividend Growth portfolio have known for a while how much we like shares of Hasbro, and we continue to like them. The high end of our fair value estimate range for Hasbro is $79 per share, and the company yields 3%. The firm’s dividend growth prospects are fantastic, boasting a Dividend Cushion ratio of 1.7 (the greater the ratio above 1, the better). Be sure to learn about the Dividend Cushion here if you haven’t already. Hasbro’s weighting in the Dividend Growth portfolio is ~9%, the largest. You must be so pleased!