“…the highlight of the firm’s portfolio was its performance in the ‘Girls’ product category, where revenue leapt 57% in the quarter and 48% in the first nine months of 2016 on a year-over-year basis. The Disney Princess and Frozen product lines remain the core drivers of such strong performance, with ancillary growth coming from the Dreamworks’ Trolls as well as the Baby Alive and Furby product lines.” – Kris Rosemann
By Kris Rosemann
Dividend Growth Newsletter portfolio holding Hasbro (HAS) reported one of the most successful quarters in company history October 17. The firm registered company records in quarterly revenue and earnings as each of its major operating segments generated sales growth. US and Canada revenue advanced 16% on a year-over-year basis in the quarter, while International revenue increased 13%. Its Entertainment and Licensing segment hopes to continue building momentum as revenue grew 8% from the year-ago period, which helped the company to record quarterly sales of nearly $1.7 billion. We like Hasbro a lot.
Strength in Europe and Latin America helped Hasbro’s International segment overcome relative weakness in the Asia Pacific region, but the highlight of the firm’s portfolio was its performance in the ‘Girls’ product category, where revenue leapt 57% in the quarter and 48% in the first nine months of 2016 on a year-over-year basis. The Disney (DIS) Princess and Frozen product lines remain the core drivers of such strong performance, with ancillary growth coming from the Dreamworks’ Trolls as well as the Baby Alive and Furby product lines. Hasbro continues to show its recent dominance over Barbie-maker Mattel (MAT) as things are beginning to gear up for the holiday season, which is more often than not the make or break quarter for both firms in any given year.
However, the impressive top-line performance was not the only noteworthy aspect of Hasbro’s third quarter report. The firm improved operating profit margin by a full percentage point from the comparable period in 2015 to 21.6% thanks in part to improvements in cost of sales, advertising spending, and product development costs. Earnings per diluted share jumped nearly 24% on a year-over-year basis in the quarter as well, and its record-setting bottom line made its presence felt on the cash flow statement. Free cash flow generation came in at more than $50 million for the first nine months of 2016, up considerably from negative $28 million in the same period of 2015. Weak free cash flow prior to the peak holiday sales season is not uncommon for a firm so dependent on the holiday season like Hasbro.
Despite the fact that its most important quarter is only a few weeks underway, we love what we’re seeing from Hasbro thus far in 2016. The firm’s solid cash flow performance in recent periods has helped its balance sheet health, while elevating its quarterly payout earlier this year, “Dividend Giant Hasbro Surges; Raises Dividend 10%+.” Since the end of the third quarter of 2015, Hasbro has improved its net debt position to ~$718 million from ~$996 million. We’re expecting the company to build on its impressive performance through the first three quarters of the year as we get into the most important, and most profitable, season of the year. Consumer spending, particularly in the US, has been an area of uncertainty as of late, driven by concerning trends in retail and restaurants, but Hasbro’s impressive performance in recent periods is a sign that consumers are still willing to give children what they want, even if traditional spending habits are changing.
It’s important to keep context when evaluating our position in the firm, as shares have pulled back from recent highs in the upper $80s but have far more than doubled since their addition to the Dividend Growth Newsletter portfolio at less than $32 in late 2011. Recent investor concern over the pace of growth in its ‘Boys’ product category seems to have been masked by exuberance over the tremendous performance of Hasbro’s ‘Girls’ products. We love the momentum we’re seeing within the firm’s business as it heads into the holiday season. We’re more than happy to continue letting this big winner run and think the firm’s shares have the potential to reach the high end of our fair value range, the upper $80s. Throw in a strong dividend yield of ~2.7% at recent price levels coupled and a solid Dividend Cushion ratio of 1.7, and the case for Hasbro’s inclusion in the Dividend Growth Newsletter portfolio is a good one.
Note: Hasbro is another example of the flexibility of the Valuentum methodology in practice. First, while the framework for a company to be included in the Dividend Growth Newsletter portfolio is not as dependent on valuation as the Best Ideas Newsletter portfolio, valuation is still a consideration in the management of both portfolios. In the case of Hasbro, however, its “fair” valuation consideration (shares are trading near our fair value estimate) is not enough to cause us to remove the company from the Dividend Growth Newsletter portfolio at this time, particularly in light of the lack of other exciting dividend growth choices on the market that also have better valuation opportunities. In many cases, when it comes to stock selection, there are relative trade-offs, and Hasbro in this case still makes the cut. We’ve been mighty pleased to let this “winner” run — the “entum” in Valuentum…