This report smacks a little like the cockroach theory
Price: $20
12 Month Price Objective: $30
Estimates (Dec) 1998A 1999E 2000E
EPS: $1.07 $1.40 $1.55
P/E: 18.7x 14.3x 12.9x
EPS Change (YoY): 38.3% 6.4%
Consensus EPS: $1.46 $1.59
(First Call: 04-Oct-1999)
Q2 EPS (Jun): $0.65 $0.74
Cash Flow/Share: $1.93 $2.68 $3.15
Price/Cash Flow: 10.8x 7.8x 6.6x
Dividend Rate: $0.21 $0.24 Nil
Dividend Yield: 1.0% 1.1% Nil
Opinion & Financial Data
Investment Opinion: B-1-1-7
Mkt. Value / Shares Outstanding (mn): $4,292.2 / 205
Book Value/Share (Jun-1999): $8.71
Price/Book Ratio: 2.4x
ROE 1999E Average: 17.0%
LT Liability % of Capital: 18.5%
Est. 5 Year EPS Growth: 14.0%
Stock Data
52-Week Range: $37-$19
Symbol / Exchange: HAS / NYSE
Options: Pacific
Institutional Ownership-Spectrum: 70.7%
B
ú HAS reported solid 3Q. On track to hit 30%
EPS growth for the year. Problem is
consensus called for a 36% increase. Thus
lowering estimates.
ú Management stressed that its guidance never
changed and that analysts? expectations got
too far ahead of reality.
ú Lowering price obj. from $35 to $30 on lower
estimates. However, better visibility exists on
2000.
Fundamental Highlights:
ú Reported sales and earnings growth of 16% in
quarter.
ú Business strong on all fronts. International up
30% and US up double digits. Strong demand
exists for Star Wars, Pokemon, Interactive
and Furby. Only weakness in line is
Teletubbies.
ú Management very focused on exiting 1999
clean and creating environment for good
earnings growth in 2000
Hasbro Inc ? 14 October 1999
2
What Has Changed?
Hasbro reported sales and earnings in line with our
expectations. Sales totaled $1.1 billion and earnings
equaled $0.43 per share, representing gains of 16% in
both. EBITDA increased 22% and totaled $1.00 per share.
Growth was led by strong demand for Pokemon, Furby,
Interactive and Star Wars.
During the conference call management noted that they
remain comfortable with roughly 30% earnings growth for
the year. While this is very respectable growth,
particularly for a company trading at 14x earnings, it is
below consensus of $1.46 and below our overly optimistic
$1.50. Given that Hasbro's business remains strong, it
begs the question why are they taking numbers down? We
believe there are three key reasons. First, comments made
on the 2Q99 by the then CFO misguided analysts to a
higher earnings estimate; higher than the company was
comfortable with. Thus, the company basically is
rescinding that. In addition, given the well-known
challenges that face the company in 2000, we believe that
Hasbro's first priority is to exit the year with very clean
retail inventories as opposed to pushing to make the year.
Lastly, with the stock at low levels in spite of the strong
business trends, it likely wouldn't get paid for hitting
consensus anyway because investors are focused on Star
Wars and year 2000. Thus, we believe they are taking a
conservative posture for 4Q.
The company's business appears to be strong. Hasbro has
a strong line up in the Interactive segment for the fourth
quarter. Pokemon is exceeding estimates by almost $100
MM for the year. Furby remains in strong demand and
Star Wars remains on track to hit sales of 650 MM and the
company has shipped in virtually the entire amount.
Demand for products such as Action Man, traditional
board games, Beast Wars is solid as well. The only weak
spot in the companies business is pre-school, which is
being dragged down by an estimated $50 MM decline in
sales of Teletubbies -- not that meaningful.
The company has addressed slow moving skus in its Star
Wars portfolio, lowering prices and giving retailers co-op
advertising dollars. It has expensed these actions in its
P&L. We believe that the Christmas re-release of Star
Wars together with the $25-$30 MM budgeted for 4Q99
advertising will drive sell through. Sell through of other
products remains strong.
We are reducing our earnings estimates for 1999 and 2000.
For 1999 we are going from $1.50 to $1.40 and for 2000,
we are reducing our estimate from a range of $1.65-$1.70
to $1.55. We would note that we believe that Wizards
acquisition will contribute $0.15-$0.20 to earnings in
2000.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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