Description
Hasbro currently trades near a 10 year low as it continues to focus on core brands several years after blowing up. Hasbro’s turnaround and change in strategy began in September of 2000 after divesting Hasbro Interactive and Games.com. The company decided that it would embark on a series of cost cutting initiatives and begin to focus on maintaining and extending core brands while supplementing the business with selected licenses. These core brands include many of the preeminent classics that have existed for several generations such as Monopoly, Clue, Trivia Pursuit, Candy Land, G.I. Joe, Transformers Tonka, Playskool, Easy Bake, and Mr. Potato Head. This basically means that HAS will not rely on finding new hot licenses every year to simply replace lost revenues. HAS held a meeting in November with analysts at its headquarters to display their product extensions prior to toy fair (starts next week). HAS was finally able to show progress by extending core brands into new markets. They are also going after the preschool and girls segments with new lines (see yesterday’s company release to see the list of toys for 2003).
Another issue that has plagued this stock has to with license for Star Wars merchandise. In 1998, HAS won the auction for a 10 year license of Star Wars toys from Lucas Film guaranteeing $590 million in royalties over its life. The agreement called for four payments, $250 million upon signing, $100 million upon the release of episode one in May 2000, $120 million upon the release of episode two in May 2002, and $120 million upon the release of the final episode in May 2005. Thus at this point, HAS has already made the first three payments totaling $470 million leaving the final payment of $120 million to be made on May 2005. Through the end of 2002, HAS should have expensed $300 million leaving 6 years and $290 million on the original agreement. Since sales had not been nearly as strong as originally anticipated, many analysts and investors were forecasting a large write down of the prepaid expenses. In my opinion this write-down were have only been a headline risk since it would have been non-cash. However, HAS announced last Monday that they had reached a new agreement with Lucas. The new agreement calls for a 10 year extension to the license and lowers the minimum payment to $505 million. Thus HAS now only owes $35 million in its final payment and has through 2018 to expense these payments. While there are no plans to produce new movies, the license would cover these as well. In return, HAS extended the warrants originally issued to Lucas for another 10 years and provided Lucas with a “put” option for $100 million in cash or $110 million in stock. The warrant extension is not very costly for HAS since they only become dilutive after a 60% move in the stock.
Despite all the problems HAS has faced through the years; the company generates about $300 million in normalized free cash a year off its core base. With a market cap of $1979 this is translates into a free cash flow yield of 15% or 9.4% on an Enterprise Value basis. The company’s efforts should start to be realized on a Net Income basis in 2003 as they receive the benefits of their cost cutting efforts. They are guiding for a 10% operating margin in 2003 which should be over 200 basis points above 2002. HAS chose to expense their restructuring efforts rather than take large write-down. In the near term, you can expect the majority of free cash to be used to pay down debt. This deleveraging will also boost the company’s bottom line. Once HAS starts to show these improvements, investors and analysts may begin to close the 28% discount that they trade relative to Mattel.
In my opinion Hasbro’s downside is limited from here because change will be forced if progress cannot be shown. In light of Mattel’s turnaround at the helm of former Kraft CEO, Bob Eckert, the potential of this company should be evident.
On Thursday, Hasbro will report 4Q earnings. They will also be hosting an analyst meeting the following day to showcase their new 2003 toy line for Toy Fair which begins on Monday. Barring any unforeseen problems, Hasbro appears ready to make the necessary transition. While sentiment remains low on the company, it is clear that analysts are starting to recognize their efforts and see the turnaround potential in the name.
2/11/2003
Pawtucket El Segundo
RI CA
Hasbro, Inc. Mattel, Inc.
Symbol HAS MAT
Stock Price $11.43 $20.85
52 week High 16.98 22.36
52 week Low 9.87 15.05
% off high -32.7% -6.8%
% off low 15.8% 38.5%
NTM Multiple
Current 12.77 16.66
at Low 11.03 12.03
at High 18.97 17.87
Price Change
YTD (1.04%) 8.88%
1 mo (3.54%) 4.77%
3 mo 6.42% 11.08%
6 mo (7.45%) 9.97%
1 yr (15.65%)17.46%
Shares Outstanding 173.2 437.4
Market Capitalization 1,979 9,120
Enterprise Value 3,198 8,700
Float 155 429
Short Interest 4.39 4.76
Short/Float 2.83% 1.11%
Avg. Daily volume (in 000s) 830 2118
Avg. Daily volume $$ (in 000s) $9,485 $44,154
Days to Cover 5.3 2.2
Avg. Daily volume (in 000s) L10days 723 3415
Avg. Daily volume $$ (in 000s) $8,264 $71,203
Days to Cover 6.1 1.4
Dividend 0.12 0.00
Yield 1.0% 0%
Book Value/Share $6.58 $4.52
Book Value 1139.08 1978.70
Price/Book 1.74 4.61
3 YR Avg. 1.80 4.29
Premium/Discount to Avg. -3.5% 7.3%
I. P/E VALUATION
Earnings Per Share (CY)
1998 1.07 $0.84
1999 1.42 0.43
2000 -0.14 0.69
2001 0.61 0.81
2002E 0.58 1.10
2003E 0.90 1.26
next 12 mos 0.90 1.25
Price/Earnings 1999 8.05 48.49
2000 (81.64) 30.22
2001 18.74 25.74
2002E 19.71 18.95
2003E 12.70 16.59
next 12 mos 12.77 16.66
TEV/EBITDA 1999 6.26 11.29
2000 54.35 14.82
2001 10.58 14.48
2002E 6.55 8.35
2003E 5.56 7.68
Free Cash Flow Analysis
2003 Net Income 154.98 547.38
D&A 225.9 262.5
Cap Ex -54.79 -180.00
Free Cash Flow before Dividends 326.10 629.89
Dividends 20.77 0.00
Free Cash Flow after Dividends 305.33 629.89
FCF/share 1.88 1.44
Price/FCF 6.07 14.48
FCF Yield 16.5% 6.9%
Earnings Growth
1999 to 2000 -109.86% 60.47%
2000 to 2001 -535.71% 17.39%
2001 to 2002 -4.92% 35.80%
2002 to 2003 55.17% 14.27%
FC LT growth rate 10.50% 14.17%
2003 PE/FC LT Growth Rate 1.21 1.17
Quarterly Earnings: Calendar year
2001a 1Q -0.09 -0.01
2001a 2Q -0.06 0.04
2001a 3Q 0.37 0.48
2001a 4Q 0.40 0.33
2002a 1Q -0.10 0.02
2002a 2Q -0.03 0.07
2002a 3Q 0.32 0.58
2002E 4Q 0.38 0.43
2003E 1Q -0.04 0.03
2003E 2Q 0.02 0.08
2003E 3Q 0.42 0.62
2003E 4Q 0.50 0.51
Quarterly Earnings Growth
2000 - 2001 1Q -212.50% 0.00%
2000 - 2001 2Q -250.00% 300.00%
2000 - 2001 3Q 362.50% 17.07%
2000 - 2001 4Q -217.65% 17.86%
2001 - 2002 1Q 11.11% -300.00%
2001 - 2002 2Q -50.00% 75.00%
2001 - 2002 3Q -13.51% 20.83%
2001 - 2002 4Q -4.55% 30.30%
2002 - 2003 1Q -60.00% 70.83%
2002 - 2003 2Q -166.67% 15.58%
2002 - 2003 3Q 31.25% 7.68%
2002 - 2003 4Q 29.64% 19.03%
Change in Current Qtr Estimate (%)
One Week 0.0% 4.0%
One Month 0.1% 0.5%
Three Months -3.2% 5.1%
Change in FY 2002 Estimate (%)
One Week 0.0% 1.5%
One Month 0.1% 4.6%
Three Months -3.3% 4.7%
Change in FY 2003 Estimate (%)
One Week 0.0% -1.5%
One Month 0.4% -4.2%
Three Months -0.7% -3.5%
Quarterly Revenues
2001a 1Q 463 715
2001a 2Q 511 836
2001a 3Q 893 1,575
2001a 4Q 989 1,561
2002a 1Q 452 742
2002a 2Q 546 804
2002a 3Q 821 1,669
2002E 4Q 1,821
Quarterly Revenue Growth: Year over Year
1998 - 1999 1Q 38.44% -22.18%
1998 - 1999 2Q 52.88% -22.37%
1998 - 1999 3Q 16.15% -15.76%
1998 - 1999 4Q 22.01% -16.56%
1999 - 2000 1Q 15.72% 0.72%
1999 - 2000 2Q -11.00% 1.94%
1999 - 2000 3Q -2.33% -0.25%
1999 - 2000 4Q -26.92% 3.82%
2000 - 2001 1Q -40.10% 3.16%
2000 - 2001 2Q -34.35% 2.26%
2000 - 2001 3Q -16.71% -0.54%
2000 - 2001 4Q -14.97% -0.88%
2001 - 2002 1Q -2.38% 3.75%
2001 - 2002 2Q 6.85% -3.81%
2001 - 2002 3Q -8.15% 5.98%
2001 - 2002 4Q 16.67%
II. ENTERPRISE VALUATION
Current Current
Cash/ST Investments 43.85 1267.00
ST Debt 318.64 207.50
LT Debt 856.26 640.10
Preferred/Other 0.00 0.00
Net Debt 1,218.75 (419.4)
Market Cap 1,979.3 9,119.8
Total Ent. Value 3,198.0 8,700.4
Debt/Total Cap 50.8% 30.0%
S&P Bond Rating BB BBB
EBITDA(MM) 1999 511.21 770.34
2000 58.84 586.94
2001 302.34 600.80
2002E 488.51 1,041.86
2003E 574.81 1,133.48
EBITDA multiple sensitivity to 1 pt. Multiple change $3.32 $2.59
as % of stock price 29.0% 12.4%
Full Year 2002 EBITDA Estimate
Net Income 100.4 481.1
Taxes 58.5 184.3
Tax Rate 36.8% 27.7%
Interest expense (income) 103.7 113.9
D&A 225.9 262.5
EBITDA 488.5 1,041.9
Rent
EBITDAR
Full Year 2003 EBITDA Estimate
Net Income 155.0 547.4
Taxes 90.2 209.7
Tax Rate 36.8% 27.7%
Interest expense (income) 103.7 113.9
D&A 225.9 262.5
EBITDA 574.8 1,133.5
Rent
EBITDAR
III. FINANCIAL AND OPERATING STATISTICS
Leverage:
Total Debt/Total Assets 36% 19%
Net Debt/Total Cap (at market value) 38.1% -4.8%
Net Debt/2003E EBITDA 2.12 (0.37)
2003 EBITDA/interest expense 5.54 9.95
Current ratio 1.37 1.45
Profitability LTM
Gross margin 56.08% 48.33%
SG&A % 40.88% 32.32%
EBITDA margin 10.11% 15.56%
EBIT margin 6.47% 15.56%
Pretax margin 3.61% 12.72%
Tax rate 35.52% 26.79%
Net Margin 2.33% 9.31%
ROA 2.03% 10.72%
ROE 5.28% 26.31%
Efficiency
Days Receivable
Inventory turns 4.17 5.14
Inventory/payables
IV. VALUATION MATRIX
2002 Price to Earnings HAS MAT
HAS 0.0% 4.0%
MAT -3.8% 0.0%
2003 Price to Earnings HAS MAT
HAS 0.0% -23.4%
MAT 30.6% 0.0%
2003 EV/EBITDA HAS MAT
HAS 0.0% -27.5%
MAT 38.0% 0.0%
VI. ESTIMATE DISPERSION
High 2002 0.95 1.35
Mean 2002 0.90 1.26
Low 2002 0.85 1.20
High/Mean 5.56% 7.41%
Low/Mean 5.88% 4.74%
High 2003 1.17 1.51
Mean 2003 1.14 1.41
Low 2003 1.10 1.34
High/Mean 3.08% 7.18%
Low/Mean -3.08% -4.89%
High Next Q 0.45 0.04
Mean Next Q 0.38 0.03
Low Next Q 0.34 0.02
High/Mean 18.42% 17.07%
Low/Mean -10.53% -41.46%
Catalyst
1) 4Q earning report on 2/13 and 2003 outlook. Investors would probably look through any weakness in the Q.
2) Toy Fair analyst presenation on 2/14.
3) The stock is starting to be recognized as being where Mattel was 18 months ago in its turnaround. The sellside appears to be coming back to the name.