Hasbro, Inc. (NYSE:HAS) surprised Wall Street with a huge profit beat. The company beat earnings estimates by a wide margin — excluding tax reform. Hasbro also announced an increase in its dividend — something it’s done most years.
Despite the profit beat, however, Hasbro acts as a slow-growth firm in most respects.
The retail landscape has changed. And change could allow for a merger with a key peer that could offer increased leverage and pricing power to Hasbro stock.
Hasbro stock blew away earnings estimates
The Pawtucket, Rhode Island-based toy and media company beat on earnings but missed on revenue due to poor sales of Star Wars toys.
The company reported fourth-quarter 2017 earnings at $2.30 per share (EPS), 50 cents per share ahead of analyst estimates. This number, however, excludes U.S. tax reform with which earnings plummet to a 4 cent loss.
Unfortunately for the company, its $1.6 billion in reported revenue missed estimates by $120 million. It also represented a 1.1% decline in year-over-year earnings from 4Q 2016.
Full-year numbers for 2017 provide an improved picture. Its $5.21 billion in reported revenues was an increase of 4% from 2016 levels. In the same period, the company earned an adjusted $5.46 per share, 52 cents per share ahead of consensus estimates. With tax reform accounted for, EPS was $3.12.
Still, the stock remains in a slow-growth mode
Although the earnings beat sent HAS higher, Hasbro stock appeals mostly to income-oriented investors.
It trades at about 20 times earnings. The five-year growth rate for both revenue and earnings have been mired in the single digits. It also increases its dividend most years. With this 6-cent per share quarterly increase, the annual dividend now stands at $2.52 per share. This increase brings the dividend yield to about 2.5%.
A potential merger could reinvigorate the slow growth, however.
History shows that Hasbro has done well when it expands its empire. Over the years, the company has bought out brands such as Kenner, Milton Bradley, and Parker Brothers. And as a result, Hasbro owns some of the more familiar board game and toy brands –including Monopoly, G.I. Joe, Mr. Potato Head and Play-Doh. It also produces electronic versions of some games and owns Hasbro Studios and operates Discovery Family.
Also included in its empire is a toy-licensing agreement with Walt Disney Co (NYSE:DIS). This agreement gives Hasbro the right to produce action figures from the various Disney movies and from Lucasfilm.
Acquiring Mattel could energize Hasbro stock
As the only comparable company in existence, Mattel, Inc. (NASDAQ:MAT) would become Hasbro’s merger target. Mattel owns popular toy brands such as Fisher-Price, Barbie and Hot Wheels.
Recently, Wall Street entertained rumors that Hasbro would acquire Mattel . This combined company would dominate non-electronic toys. And a combined Hasbro and Mattel could invigorate what’s been a slow-growth stock.
Fears that the Department of Justice (DOJ) would block such a deal over “monopoly” fears (pardon the pun) have prevented a merger for decades.
Today, however, children’s entertainment constitutes much more than board games and dolls. The electronic games of Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc. (NASDAQ:EA), and Take-Two Interactive Software Inc (NASDAQ:TTWO) also compete for attention. And so, given the numerous choices in children’s gaming, the DOJ preventing such a merger has become less likely.
Moreover, both Hasbro and Mattel have also felt the effects of changing retail habits. The company blamed the bankruptcy filing of Toys R Us for lower Christmas sales last year. A combined Hasbro and Mattel could better deal with the retail landscape increasingly dominated by the likes of Walmart Inc (NYSE:WMT) or Amazon.com, Inc. (NASDAQ:AMZN).
The Bottom Line For HAS Stock
Uncertainty on whether this merger would occur remains. Dominating the niche of physical toys could give new life to Hasbro stock, however.
HAS stock impressed investors with the earnings beat and the dividend increase. But other key metrics have grown slowly in most years.
Moreover, HAS stock has been stricken by trends pushing children toward electronic games. And the demise of Toys R Us has made sales more difficult.
Still, a combined Hasbro and Mattel could bring dominance of a key segment and increase leverage with key e-commerce retailers.
Investors should watch both HAS stock and MAT stock carefully. If these two companies merge, investors should consider a position in Hasbro stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.