Toy Maker Is Ready to Be Transformed

07/11/2007 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says Hasbro's stock should get a boost from its licensing deals, especially in connection with the hit Transformers movie.

Hasbro (NYSE: HAS) makes some of the world's most popular games and toys. North America is its largest geographic market, accounting for 67% of first-quarter revenues. About 30% came from abroad and the remainder is due to licensing revenues from the Hasbro Products Group.

Hasbro has some of the most recognized brand names in the toy industry. Milton Bradley and Parker Brothers make classic board games, such as Monopoly, Scrabble, and Chutes and Ladders.

Other top brands include G.I. Joe, Transformers, My Little Pony, Playskool, Play-Doh, Tonka, Tiger Electronics, and Nerf. Licensing agreements with Lucas Licensing and Marvel Entertainment give Hasbro rights to develop toys based on Star Wars movies and Marvel comic books.

A renewed focus on core brands and licensed merchandise has led to strong results in the past year. First-quarter net revenues surged 33.6% year over year to $625.3 million. Spider-Man branded merchandise, which benefited from the highly anticipated release of the movie Spider-Man 3, was responsible for more than half of the growth in volume. Net income jumped to $32.9 million, or 19 cents per share, up from a net loss of three cents per share a year earlier.

Some investors may be worried that the current popularity of the Spider-Man merchandise may not last very long. What is hot today may not be tomorrow. Yet Hasbro has done an outstanding job of selecting licensing opportunities. It has avoided brands that could be perceived as faddish in favor of opportunities that offer a broad portfolio of properties.

The Marvel deal provides an excellent example. Its numerous comic book characters, some of which are more than 40 years old, offer plenty of potential for future sales, especially as more of them make it onto the big screen.

Indeed, with seven films based on Marvel properties projected to be released over the next two years, Hasbro's prospects look extremely promising. Furthermore, Hasbro should benefit from the release of the much-hyped and highly anticipated Transformers film on July 2. (The movie recorded the biggest July 4th gross in history and took in $152.5 million in domestic box office receipts during its first week-Editor.)

Licensing revenues should receive a boost from the more than 230 Transformers-related agreements entered into by third parties expecting to capitalize on the film. If Transformers becomes as big a hit as expected, it could signal more movie opportunities for Hasbro-owned properties, which may further boost brand awareness and toy sales. Indeed, a G.I. Joe movie is already in the works.

And Hasbro continues to see strong demand for [its traditional] games, puzzles, and preschool toys, which experienced [above]-average growth in 2006.  (The stock closed above $32 Tuesday, not far off its 52-week high-Editor.)

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