​Playful Profits at Hasbro

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We are initiating coverage of Hasbro (HAS)—the maker of toys and games, including digital games—with a Buy rating and a target price of $128 per share, notes John Staszak, analyst with the leading independent advisory firm, Argus Research.

The company has leading brands including Nerf, My Little Pony, Monopoly, Transformers, Play-Doh, and Transformers. It is also licensed to manufacture Star Wars, Jurassic Park, and Marvel toys.

Hasbro has reported positive earnings surprises for six straight quarters, reflecting strong product development efforts. It is also taking steps to boost revenue and take share from competitors, including partnering with media and entertainment companies and expanding its presence in emerging markets.

Looking ahead, we expect the company to restore growth in core brands such as Star Wars and My Little Pony, and to benefit from the release of new Beyblade toys in 2017.

HAS shares trade at 22-times our 2017 EPS estimate, above the average multiple of 19 for a peer group of leisure and entertainment companies.

We believe that the premium valuation is warranted given Hasbro’s strong revenue and earnings prospects
and steady toy demand.

Hasbro shares have advanced 42% year-to-date, versus a 9% gain for the S&P 500 and a roughly 12% advance for a peer group of consumer discretionary companies. Over the past five years, HAS shares have more than tripled.

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On April 24, Hasbro reported better-than-expected 1Q17 sales and operating earnings. We were impressed that Hasbro was able to boost revenue despite a weak retail environment and substantial discounting by competitors.

We project 2017 revenue of $5.4 billion, up 8% from the prior year, driven by steady demand for the company’s toys and games, and growth in emerging markets, offset in part by foreign exchange headwinds.

We look for a 4% increase to $5.6 billion in 2018.

We expect the operating margin to rise 20 basis points this year, to 16.6%, with a further increase to 16.8% in 2018. We look for long-term margin growth to be driven by the company’s Franchise Brands and Entertainment and Licensing business.

We are setting EPS forecasts of $5.00 for 2017, above the consensus of $4.93, and $5.35 for 2018, above the consensus of $5.18. Our estimates assume continued stock buybacks and take account of the company’s history of positive earnings surprises.

Our target price of $128 implies a multiple of 25.6-times our 2017 EPS forecast and a potential total return, including the dividend, of 19% from current levels. Our long-term rating is also Buy.

John Staszak is a securities analyst at Argus Research specializing in consumer discretionary and consumer staples sectors.

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