Joel Greenblatt and Paul Tudor Jones Bet on Hasbro

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Mar 19, 2015

In this article, let's take a look at Hasbro Inc. (HAS, Financial), a $7.64 billion market cap company, which is a company with a broad portfolio of toys, games and entertainment offerings includes brands such as Transformers, Playskool, Monopoly and My Little Pony.

Expanding its Business

International operations are an important driver and the company plans to focus on emerging markets. Countries such as Brazil, China, Czech Republic, Colombia, Korea, Peru, Romania and Russia are regions that could accelerate growth.

We believe that growth would come in the U.S. and Canada, countries where revenue growth is important again. Of course, a weaker demand as well as few ideas in new toy introductions could hurt revenues in the future.

Increasing competition is another key point for traditional toy companies. Nowadays, children have a lot of entertainment offerings from other companies, like video games. So, it is crucial to maintain the market share to constantly launch innovative products. The business could expand also through television and movies, where the firm has a 50% interest in a joint venture with Discovery Communications.

Dividend Yield

The company has a strong balance sheet and good cash that allows the company to hike its dividends in the future. The current dividend yield is 2.8%, which is higher than the industry median of 2.14%. Dividends have been paid since 1981 and in the last five years it has paid out about $900 million.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 1.31% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.34 vs $0.88). During the past fiscal year, the company increased its bottom line. It earned $3.24 versus $2.17 in the previous year. This year, Wall Street expects an improvement in earnings ($3.25 versus $3.24).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
HAS Hasbro 27.03
PII Polaris Industries Inc 64.31
ACAT Arctic Cat Inc 12.60
BC Brunswick Corp 21.29
Ă‚ Industry Median 7.21

The company has a current ROE of 27.03% which is higher than the industry median and the one exhibit by Arctic Cat Inc. (ACAT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Polaris (PII, Financial) and Brunswick (BC, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Dec05 12.61
Dec06 14.11
Dec07 22.79
Dec08 22.10
Dec09 25.12
Dec10 24.78
Dec11 25.41
Dec12 22.98
Dec13 17.95
Dec14 26.42

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 19.25x, trading at a discount compared to an average of 34.2x for the industry. To use another metric, its price-to-book ratio of 5.22x indicates a premium versus the industry average of 2.35x while the price-to-sales ratio of 1.86x is the same as the industry average.

The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,256, which represents a 14% compound annual growth rate (CAGR).

Final Comment

As outlined in the article, international expansion is behind the potential stock upside. Hasbro's leader position in entertainment is threatened by the strong competition offered by traditional and new entertainment companies.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock. Further, the strong cash that can continually maximize shareholder´s value make me confident on this stock.

Hedge fund gurus like Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) bought the stock in the last quarter of 2014. Others like Jim Simons (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) have taken long positions.

Disclosure: Omar Venerio holds no position in any stocks mentioned