We plan to raise our fair value estimate of the narrow-moat firm to account for its ability to raise the top line again in the year ahead.
By Jaime M. Katz, CFA | 02-06-17 | 09:33 AM | Email Article

After Mattel’s dismal portrayal of the delayed holiday season, we waited with bated breath for  Hasbro’s take on the period. Narrow-moat Hasbro didn’t disappoint, coming out the clear winner of takeaway at retail.

Jaime Katz, CFA, is a senior equity analyst for Morningstar.

The NPD numbers Mattel had quoted implied a fourth-quarter slowdown and, more important, a consumer shift in the timing of purchases--the first three weeks of December had notched declines at 7% before rallying closer to Christmas. In this case, it seems clear that Hasbro has taken aggressive market share over the past few months, with fourth-quarter point of sale rising 11% globally and noted as "strong" in the United States and Canada.

We plan on raising our fair value estimate to account for the outperformance in the most recent quarter, the incremental margin leverage the company continues to capture, and the ability to raise the top line again in the year ahead, despite lapping the add-on of Disney Princess in 2016 (which increased girls sales 50% in the year), thanks to another significant content year (Star Wars, Transformers, Beauty and the Beast, Marvel) and the ongoing success of the firm's partner brands. 

Hasbro hit two milestones in the quarter: First, it generated more than $5 billion in revenue for the year, surpassing longtime industry leader Matter on the top line. Second, it generated peak operating margin performance of more than 16% (in the past, it had targeted a long-term margin of 15%), well beyond peer performance; Mattel’s was 10% in 2016. During the quarter, top-line growth of 11% ($1.6 billion) was bolstered by strength in all regions, with U.S. and Canada sales rising 10% and international sales ticking up 10%. Entertainment and licensing was up 36%, helped by the addition of Boulder Media. There was little to dislike on the reported revenue side, with franchise brands growing 3%, games rising 11%, and partner brands expanding 16%.

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Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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