Wednesday July 5, 6:10 pm Eastern Time

worldlyinvestor.com Sector of the Day
Hasbro Now Has It
By Glenn S. Curtis, Columnist

Curtis says that Hasbro is more than just toying with a turnaround.

Toy maker Hasbro (NYSE:HAS - news) has had a rough go of things in the last 12 months.

The negativity started in the second half of 1999 when most Hasbro investors jumped ship as the company announced it would take a $141.6 million pre-tax charge to cover costs from a reorganization.

This was followed by a slew of bad news emanating from competitor, Mattel (NYSE:MAT - news), and a general lack of interest in toy companies among investors. The chain of negativity caused this fallen angel to drop more than 40% from its yearly high. And, while some investors are still sitting on the sidelines, I think now is the time to buy the stock.

Leaner and Meaner
After taking the fourth-quarter charge that included cutting 2,200 jobs or 19% of its work force, closing two plants and shifting much of its manufacturing to Asia, Hasbro is a leaner and meaner organization. Total savings from these efforts should come to $16 million in 2000 and $23 million or more in 2001. In the first quarter ended April 2, 2000, Hasbro's earnings were up 14.2% on revenue of $773.5 million.

The company's Pokemon toys and games as well as the Furby product line were the key drivers of growth. In addition, the company continues to generate substantial revenue from its other name brands that a few of us as kids grew up with, including Tonka, Playskool, Parker Brothers, Milton Bradley and Galoob.

Hasbro's diverse product line and proven ability to bring quality games to market is reason enough to think that the stock is a bargain in the mid teens. But another big boost could come in the form of the planned launch of an Internet game site, Games.com. The site is expected to go live sometime in the fall.

Most analysts believe that the launch could prove to be a big catalyst for the stock. Some have suggested that it could add as much as $5 a share to the current stock price, although I would point out that there are few if any revenue projections for the site (although some have speculated that $15 to $20 million in first-year revenue is doable).

I would suggest that news surrounding the site's number of unique visitors, ``stickiness'' and total page views could help provide some lift to the share price. While it's premature, talk of an IPO could provide even a bigger lift down the line.

Solid Institutional Holdings
As of the end of the first quarter institutional ownership was a very healthy 76% of the outstanding shares. However, most retail analysts have been fairly shy in their recommendation of the stock (although most are bullish on the long term prospects). I think that when the sell side analysts finally get behind Hasbro in force, that it will prove to be a big factor in moving the stock to the next level. Further, even the slightest increase in interest among institutions could soak up the existing supply of stock in the market, forcing the price to move up.

Another plus is that the under the current stock buyback program the company has repurchased more than 37 million shares. This will help to reduce the total share count and provide a boost in earnings per share. There is roughly $200 million still allotted for repurchasing stock from time to time in the open market. With Hasbro expected to report just shy of $400 million in free cash flow (approximately $2.20 per share) in 2000 additional funds could be allocated for share buybacks or to make acquisitions.

In addition to the above-mentioned items the company should also benefit from a host of new products including: Harry Potter trading cards, the interactive Poo-Chi - a robotic canine that fits in the palm of your hand, and the interactive Yoda (from Star Wars).

These products, coupled with existing games and toys (such as Pokemon and Furby) are expected to provide a boost, perhaps in the range of 6% to 9% to the company's top line in 2000 and 2001. Accordingly, revenue estimates of $4.5 billion in 2000 and $4.8 billion in 2001 look very doable given the product pipeline.

By the Numbers
Consensus estimates have Hasbro earning $1.41 per share in 2000 and $1.64 per share in 2001. At just 0.6 times sales, roughly 5 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), the stock certainly appears to be a bargain.

Further, at 10.5 times 2001 estimates, the stock is trading at sizeable discount to its expected earnings growth rate of 16.3%, confirming in my mind that it's a steal. The stock's worth $25 if the company meets Street estimates and north of $30 if the negative sentiment regarding toy and consumer products stocks in general begin to turn.

Glenn Curtis is an analyst for worldlyinvestor.com. Prior to working at worldlyinvestor.com, he was an analyst at InsiderTrader.com, a financial Web site, and at Cantone Research, a brokerage firm in New Jersey. Curtis is series 6, 7, 24, and 63 licensed. He does not hold a position in any of the stocks mentioned in this column. Positions may change at any time.

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