Hasbro drops on earnings and shares offer deep discount to market

Hasbro (HAS), the world's no. 2 toymaker after Mattel (MAT), easily beat Wall Street's profit estimate when it reported third-quarter results Monday, but shares fell as much as 5 percent on disappointing revenue. Hasbro, based in Pawtucket, Rhode Island, cut prices to ensure that cash-strapped consumers would keep buying Transformers and G.I. Joe–themed toys.

Naturally, that has investors worried about sales and margins heading into the all-important holiday season. Make no mistake, it's tough to love the traditional toy business. Industrywide sales stand at about $21 billion a year, but there's no growth there, as kids increasingly opt for Apple (AAPL) iPods, Nintendo (NTDOY)'s DS handheld video-game consoles, or fashionable clothes.
Still, there's reasons to like Hasbro shares heading into the holidays and beyond. Price cuts are scary, but they just might save Christmas (and Hannukah, and Kwanzaa). Consumers this year will focus heavily on "value" -- getting the most bang for their bucks -- according to NPD Group, a market research firm in Port Washington, New York. That low-price strategy just might help Hasbro grab some market share. And Hasbro is banking on the DVD release on Tuesday of Transformers: Revenge of the Fallen to give the franchise brisk business this gift-giving season. Indeed, in the most recent quarter, sales of boys' toys rose 12 percent.

Hasbro's fundamentals are by no means stellar, but the share price appears to discount the risks in this brutal retail environment. The stock is down almost 3 percent on the year, trailing the S&P 500 ($INX) by nearly 25 percentage points. (Hasbro trails the market by 30 points since the March low.) That leaves the valuation at compelling levels: shares go for less than 14 times forward earnings, offering a discount of 30 percent to the broader market. Add the the 2.7 percent dividend yield to analysts' average price target, and you get implied upside of nearly 7 percent in the next 12 months or so.

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