Toy Story

Grown-ups, take note: The lucrative toy market isn't just child's play.

Magazine Contributor

May 1, 1998 3 min read

This story appears in the May 1998 issue of Entrepreneur. Subscribe »

The company: Hasbro Inc. is the second-largest toy manufacturer in the world, sharing industry control with Barbie purveyor Mattel Inc. The company markets its products primarily through its Playskool, Tonka, Kenner, Milton Bradley and Parker Brothers brands.

The markets: Many of Hasbro's toys target 5-to-14-year-olds, an age group the U.S. Census Bureau expects to grow by nearly 1 million by 2000.

Increasingly, purchasing power has become concentrated in the hands of several large retail chains, notably Toys "R" Us, Wal- Mart, Kmart and Target. Because of these companies' purchasing and marketing strategies, larger toy manufacturers that can offer broad product lines, high advertising budgets and frequent deliveries have been favorably affected.

The sizzle: Hasbro recently made some long-awaited moves to restructure its operations and improve shareholder return. That should help the company realize $40 million in savings. The company also retains one of only two licenses to sell "Star Wars" merchandise. With the first movie of the second trilogy set for release next year, this license should result in healthy revenue streams in the future.

The risks: Unfortunately, the only true experts in the toy business are knee high, and overall profitability heavily depends on the third and fourth calendar quarters.

The toy business is relatively stable, growing at a compound average rate of 6 percent annually. Any of the benefits gained from the overall stability of the business, however, are negated by the risks associated with owning a company in the midst of major changes.

Historical financial performance: Over the past five years, Hasbro has delivered a meager compound annual return of 8.5 percent to shareholders, compared with Mattel's return of 24 percent over the same period. This performance, along with management's rejection of a takeover bid from Mattel in 1996, forced Hasbro to implement restructuring plans.

Projected financial performance: Hasbro trades at a 20 percent discount to S&P 500 companies and Mattel. Assuming a modest $30 million cut in operating costs in 1998 and a 4 percent reduction in outstanding shares, Hasbro can expect to see an earnings growth of at least 10 percent this year. If the company achieves 12 percent or higher EPS growth due to the major product push it's planning in conjunction with the upcoming movie "Small Soldiers" and keeps its cash growing, there's a good chance investors will reward it with a slightly higher P/E multiple, which currently stands at 15 times forward earnings. Growth is also contingent on Hasbro's successful execution of its restructuring plans. Combined with EPS growth and slightly expanded multiple-to-operating earnings in the 22 to 23 range, the shares may advance from 15 percent to 30 percent in the coming year (from a current price of $35.25). The target price this year should be in the $35-to-$40 range.

The Motley Fool can be found on the Web at http://www.fool.com and on AOL at keyword: FOOL. Alexander Schay contributed to this article. The above opinions are those of the authors and not of Entrepreneur. Past performance is no guarantee of future results.