Dueling Fools
Is Hasbro a Has Been?
May 19, 1999

The Bull Rebuttal
by Louis Corrigan ([email protected])

Hasbro's Phantom Menace promotions will rob Peter to pay Paul because, hey, you know it's Has-bro! I love that. Rick is so slick, I was almost wowed into believing him.

The problem is, Rick's assumption that the toy market is a zero-sum game is wrong. The average American kid simply can't have too many toys. The logic is especially misguided when we're talking Star Wars. A huge percentage of folks buying into the Force in recent weeks probably haven't stepped into a toy store, or the toy aisle, in the last year. Collectors alone represent a huge market, and it's not like these guys hawking merchandise on eBay had any plans to buy another Tonka trunk anytime soon.

The new Star Wars license will allow Hasbro to expand its potential market not just this year but for the next decade. Rick has tried to turn this unabashed positive into a negative: movie tie-ins have a short shelf life. When we're talking Star Wars, that's definitely true: the toys fly off the shelves!

That's not to ignore the fact that Hasbro has committed major resources to wooing George Lucas: about $600 million minimum in royalties paid over nine years, and warrants to buy 15.75 million shares (a 7.4% stake) that exercise at $23.33 a share. If Menace proves a genuine disaster, Hasbro's stock is toast. But betting your future on Lucas's creative talents and, specifically, on this property seems about as safe as buying Boardwalk. It costs a lot up front, but sooner or later, it's going to pay off big. And Hasbro has a near Monopoly!

What's more, I think Queen Amidala's got possibilities for girls. She wears great costumes, judging by the publicity photos, and Hasbro will exploit this to go after the Barbie crowd. On the other hand, the idea that Furby, Teletubbies, and Pokemon don't appeal to girls is equally wrong. These toys are, in a pretty real sense, gender neutral. Of course, Hasbro still has a full line of Spice Girls, too.

My read of the financials is considerably more upbeat as well. Using the consensus $1.53 per share estimate for FY 2000, Hasbro's earnings will grow at a 20.7% compound annual growth rate (CAGR) over the next seven quarters. Using the high-side $1.63 estimate gives us a CAGR of 25.2%, or double the number Rick mentioned. The analysts may have been seduced by the Menace hype, but this ain't Viagra we're talking about. Star Wars merchandise is a proven commodity that won't cause heart attacks. Moreover, analysts won't have their sex drive questioned if their estimates are too low.

True, it will be hard for Hasbro to maintain that type of growth over the next 5 to 10 years. Still, the final two installments of the new trilogy are due to arrive in 2002 and 2005, which should keep the Force alive. Investors should also consider the ways Hasbro has refocused its business and whether it's shown it can deliver hits in this hit-or-miss business. The recent track record certainly suggests management has a Clue (which they do, thanks to Parker Brothers). If that's the case, investors can still pocket more than Play-Doh from this investment.

Next: The Bear Responds