Hasbro Inc. (HAS) is set to report the third-quarter 2014 results on Oct 20, before the opening bell. Last quarter, the company posted a negative earnings surprise of 0.7%, due to lower-than-expected revenues. Let us see what is in store for the company this quarter.
Factors to Consider This Quarter
After declining throughout 2013, revenues from the Boys category were up 18% year over year in the first half of 2014 driven by growth in Transformers, Nerf and Marvel brands. Several major films, notably Transformers: Age of Extinction and The Amazing Spiderman II, were launched during the second quarter, which should contribute to revenues in the to-be-reported quarter. However, we believe that the segment has a long way to go to regain its lost momentum amid a difficult operating environment.
The Girls category exhibited strong momentum throughout 2013 which continued even in the first half of 2014. The company has a string of attractive products lined up under the category. Given the scenario, we expect the trend to continue in the third quarter as well. Moreover, the company’s Entertainment and Licensing segment revenues have grown since the addition of Backflip Studios in Jul 2013 and we expect the trend to continue.
Hasbro’s domestic revenues have declined over the past 3–4 quarters due to tough macro environment, thereby hurting overall top-line performance. Consumer spending uncertainty still lingers due to sluggish economic growth in the U.S. We expect sales in the soon-to-be reported quarter to be adversely impacted as customers continue to reduce their non-essential purchases.
However, the company’s cost saving initiatives has been helping it to post year-over-year earnings growth over the past few quarters. The company has also outlined a company-wide cost saving initiative and is on track to deliver $100 million in savings annually by 2015. These initiatives include reduction in workforce, facility consolidation and implementation of process improvements. Also, the company is investing in businesses where it expects long-term profitability like Backflip Studios, Magic: The Gathering and IT and digital infrastructure.
Earnings Whispers?
Our proven model does not conclusively show that Hasbro is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.72%.
Zacks Rank: Hasbro currently has a Zacks Rank #4 (Sell) which lowers the predictive power of ESP. We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies in the consumer discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
The Walt Disney Company (DIS) has an Earnings ESP of +3.41% and a Zacks Rank #2 (Buy).
Cablevision Systems Corporation (CVC) has an Earnings ESP of +18.75% and a Zacks Rank #2.
DreamWorks Animation SKG Inc. (DWA) has an Earnings ESP of +125.00% and a Zacks Rank #3 (Hold).
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