Goldman initiated coverage of toy maker Hasbro with a “conviction buy” rating, saying the stock could go to $56 a share, from around $40, where it currently trades. Goldman’s call on the toymaker follows UBS’s Monday boost of its price target for Hasbro, which helped drive the shares up 4.6%.
At that price Hasbro is trading at around 11 times Goldman’s estimate for 2011 earnings of $3.60 a share, which is above consensus. Why is Goldman more optimistic than the street? Goldman’s Michael Kelter writes:
(1) The third Transformers movie should drive strong operating results.
(2) Sales from the recently won Sesame Street toy license commence.
(3) The TV joint venture with Discovery Kids will likely turn accretive.
(4) A leveraged buyback would meaningfully reduce share count.
Hasbro has handily outperformed the broader market so far in 2010. Before Tuesday’s open the toymaker was up nearly 24% versus about 7% for the S&P 500. Rival Mattel is also doing better than the market as a whole, up about 18% so far this year. While it also views Mattel as “attractively valued” Goldman put a “neutral” call on Mattel, citing “stretched sales expectations and the potential for commodity inflation to negatively impact profitability.”
UBS sees it the other way around, preferring Mattel, in light of sales expected to be generated by the June release of Toy Story 3. “Toy Story sales have accelerated even earlier than expected as major retailers have begun promoting TS product in advance of movie specific product even reaching store shelves,” UBS analysts wrote.
But Goldman argues that Hasbro’s Transformers tie-in is a game changer in a way that hasn’t been fully appreciated. In short, Transformers is a movie about a line of toys, whereas traditionally toy-makers have produced products about characters in movies.
[wsj]
