Note: On July 1, we took some profits on Hasbro (HAS) north of $75 per share. Please read the introduction on page 1 of the July edition of the Dividend Growth Newsletter .
Image Source: Hasbro
Things are still going great at Hasbro, even as the sharp sell-off following its third-quarter report tries to tell a different story. We think the post-earnings drop in shares is merely profit taking, something we, too, had engaged in a few months ago with its shares in the Dividend Growth Newsletter portfolio. The company’s equity has more than doubled since the beginning of 2012, and investors are taking money of the table in advance of the all-important holiday season, in our view.
In Hasbro’s third-quarter report, the company’s revenue advanced 9% on a currency-neutral basis, as US and Canada segment revenues leapt 5% and international segment sales surged 14%, after adjusting for currency moves. Though entertainment and licensing revenues weren’t as strong as we would have hoped due to a difficult year-over-year comparison, segment income was fantastic and company-wide adjusted net earnings of $1.58 per diluted share advanced nicely from the $1.46 per share mark in the year-ago period. The company’s strong performance compares to a 4% constant-currency decline in worldwide sales and a collapse in operating income during the period for rival Mattel (MAT). Out of the two toy giants, Hasbro continues to be the fundamentally better operator, a blessing as it relates to performance in the Dividend Growth Newsletter portfolio.
Hasbro is not “kidding” when it says that “tremendous innovation across brands and a strong entertainment slate has driven favorable product mix and underlying profit gains.” Frankly, the company’s reinvention is rivaled by no other than the top innovators in our coverage universe, a list that might include Apple (AAPL) and Facebook (FB), for example. We’ve been extremely pleased by the trajectory of Hasbro’s fundamentals, and while performance may be lumpy at times, the company’s strength, especially when compared to rival Mattel, is phenomenal. A difficult year-over-year comparison in its ‘Entertainment and Licensing’ segment due to the release of TRANSFORMERS: AGE OF EXTINCTION in the quarter is nothing to fret over.
Not only has the retail launch of STAR WARS: THE FORCE AWAKES helped to buoy Hasbro’s results, but JURASSIC WORLD products are also selling well, and the biggest positive impact is still ahead for Hasbro. Late last year, the company won a huge deal over Mattel to produce the princess dolls associated with Disney’s (DIS) Frozen franchise, an agreement that won’t go into effect until the spring of next year. The 2013 animated film Frozen was simply a blockbuster hit across the globe, becoming the highest-grossing animated film of all time, and Disney announced in March of this year that a sequel is on its way. A launch date has yet to be hammered down for the film, but we expect a huge positive impact on Hasbro sales around the upcoming release, a distinctly forward-looking positive catalyst.
We continue to be very positive on Hasbro’s fundamental outlook, but we think it is important to note that shares are fairly valued, in our view, implying that we’d be looking to take more off the table in the event of a bounce. Though it’s difficult to predict how Hasbro will perform during the holiday season, expectations are high and the transition to producing Frozen merchandise throughout 2016 does pose some risk. We like Hasbro a lot, but we may have to continue to take profits at these levels. The company has been a huge source of outperformance in the Dividend Growth Newsletter portfolio.