Tickers in this Article: HAS, MAT, JAKK, LF, KID
Since Aug. 1, 2011, Hasbro (Nasdaq: HAS) is down 5.8% compared to a positive 8.3% for Mattel (Nasdaq:MAT) and a negative 2.7% for the S&P 500. A little more than three months later, its stock is down more than $3 from where it was in August. In my opinion, Hasbro is on sale. Here's why.
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International Business
Its third quarter international segment revenues on a currency neutral basis grew 15% to $528.1 million. International sales jumped 23% in its third quarter. On a sequential basis, its third quarter revenues grew 55%. International revenues now account for 41% of its overall business, and could represent a majority of its revenues by early 2013. CEO Brian Goldner said this about its third quarter, "We continue to expect to deliver meaningful growth in both revenues and earnings per share for the full-year 2011 versus our 2010 reported full-year results ... Our performance this year demonstrates we are successfully executing our strategy globally." Another important achievement by the international segment, in the quarter, was its operating margin, which increased 250 basis points from the same quarter in 2010. In addition, it was 110 basis points higher than its American and Canadian segments. In September 2010, the American and Canadian segment's operating margin was 790 basis points higher, for the first nine months of the year, than its international segment. One year later, the differential is down to 260 basis points. It's only a matter of time before its international segment not only generates more revenue but also more profits.

Steady Earnings
Over the past decade, Hasbro's stock has averaged an annual total return of 9%, compared to 5.8% for Mattel and 3.2% for the S&P 500. It generated consistent returns by increasing earnings per share for 10 straight years. In 2001, Hasbro had an operating profit margin of 7.4%, and earnings per share of 35 cents. In 2010, its operating profit margin was 14.7% and earnings per share were $2.74, a compound annual growth rate of 23%. Interestingly, on the revenue side, it only grew them by 4%, compounded annually. Its brand-driven strategy has certainly sharpened its profitability. For the first nine months of the year, its earnings grew, slightly, to $1.78 per share, up from $1.76 per share in the same period last year. Taking Goldner's word, it obviously sees tremendous growth in its final and most important quarter of the year. The analysts' consensus estimate for 2011 is $2.92 a share. However, the estimate for the fourth quarter is $1.22 per share. My addition, suggests that puts the yearly number at $2.98 per share. But who's counting?

Share Repurchases
Hasbro has stepped up its stock buybacks in the last couple of years. In the first three quarters of 2011, it repurchased $386.7 million in stocks, at an average cost of $40.97 a share. Between 2005 and the third quarter, it bought back $2.6 billion of its stock and paid out $700 million in dividends to shareholders. In that time, it's lowered its share count from 204 million to 139 million, today. While this has something to do with its earnings-per-share record of 10 consecutive increases, its operating margin also increased in seven of those years, so it's not as if the company wasn't doing a good job delivering profits. (To know more about stock buybacks, read: A Breakdown Of Stock Buybacks. )

Hasbro and Peers
JAKKS Pacific (Nasdaq:JAKK)
LeapFrog Enterprises (NYSE:LF)
Kid Brands (NYSE:KID)
The Bottom Line
Hasbro's medium-term objectives are to grow revenues 5%, or more, annually with an operating margin higher than 15% while generating operating cash flow around $500 million annually. It finished 2010 with operating cash of $368 million. With both the international segment and entertainment and lifestyle licensing segments doing well, I see no reason why it won't be able to hit those targets. If it's able to achieve these objectives, and its past demonstrates that shouldn't be a problem, then you are looking at a valuation that is lower, now, than it's been in the past decade. Long-term, it's proven it's a winner. Soon, it will be over $50. (For additional reading, check out: Value Investing+Relative Strength=Higher Returns. )
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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