Hasbro Earnings may not be fun and games

Kids these days spend less time playing board games or with other non-cyber toys than they do with their Xbox and Wii gaming systems. That’s not good news for Hasbro, which makes toys that range from action figures to puzzles and board games like “Trouble” and “Jenga”. Little wonder, then, that the StarMine research team selection of Hasbro (HAS.O) selected as one of the ten North American companies that it believes are most likely to report first-quarter earnings that either beat or miss analysts’ forecasts. Based on the large negative Predicted Surprise of -29%, Hasbro may fall short of those estimates when it reports results next month.

Although strong sales of the Transformers franchise of toys and the popular Beyblade brand boosted the company’s sales to $4.3 billion in 2011, gains in these international markets mask weakness in the company’s U.S. and Canadian sales. International markets have soared in their importance to Hasbro: In 2009, overseas sales totaled 36% of the company’s total revenues, while last year that figure hit 43%. In contrast, sales within the United States and – 53% of the total — fell from $2.45 billion in 2009 to $2.25 billion in 2011.

Analysts seem to be aware of this worrying trend. In the last 90 days, they have been reducing their estimates for the company’s first-quarter profits; as a result, the I/B/E/S consensus estimate for first-quarter earnings has fallen from 18 cents a share three months ago to only 8 cents a share today. The Smart Estimate is lower still, however, at only 5 cents a share. As can be seen in the chart below, the SmartEstimate (represented by the blue line) has remained below the consensus (represented by the gold line) for most of this period, and the consensus has followed the SmartEstimate down. The lower SmartEstimate indicates that the consensus may fall further still, or that the company is likely to miss estimates when it reports its earnings on April 23.

The company’s 10-K filing with the SEC contains comments about market trends that may cast a shadow over the company’s earnings prospects going forward. Hasbro referred to “children getting younger” – or the phenomenon of children beginning to play more sophisticated video games at a younger age. If the company can’t find a way to develop products or market its existing products to older children, Hasbro’s customer base may shrink. That reality may lie behind some of the decisions by analysts to reduce their earnings expectations for Hasbro. The company has taken steps to address this dilemma, investing in a Rhode Island facility called the Gaming Center for Excellence with the objective of designing an entirely new generation of games that will appeal to customers. But change of this magnitude doesn’t happen overnight and it will take time before Hasbro can see the benefits of investments like this. In the meantime, based on the large negative Predicted Surprise, it seems like Hasbro is ready to deliver an unpleasant earnings shock to its investors when it announces first-quarter results in the second half of April.

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