Hasbro: On Top of Its Game

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Further, some consumers may switch allegiance in preschool from Mattel's Fisher Price to Hasbro's Playskool line." (Sterne, Agee & Leach, which has a buy rating on the stock, makes a market in Hasbro shares and has managed or co-managed a public offering or provided other investment banking services for Hasbro within the past 12 months.)

In the international business, Transformers and Marvel products were also key drivers of a 33% surge in net revenue to $374.0 million from $280.4 million in the prior-year period. Nearly one-quarter of that increase came from a positive foreign exchange impact of about $21.7 million, while higher sales in brands such as Littlest Pet Shop and Playskool also contributed. Operating profit in the international segment jumped 33.3% to $57.6 million.

Retailers like Wal-Mart (WMT) and Target (TGT) in general aren't allocating more shelf space to toys, but they have been giving Hasbro more shelf space in their stores, Verrecchia said.

That may be a result of the success its Transformers and Spiderman 3 product lines have had this year. Verrecchia said he's excited by the prospects for sales of toys based on Marvel characters Iron Man and The Incredible Hulk, both of which are being featured in 2008 movie releases, although they won't be as popular as the Transformers or Spiderman.

"Our retailers are looking at these differently than they might have a year ago," he said.

In the girls market, Hasbro's small dolls are selling well, as the softness in that market has been limited primarily to products in the large fashion doll category, Verrecchia said.

The success of video games hasn't done any meaningful damage to the company's toys or games sales, Verrecchia said. But that may be one reason Hasbro entered into a strategic licensing agreement in August with Redwood, Cal.-based Electronic Arts Inc. (ERTS), which will catapult it into the electronic gaming market.

The partnership gives Electronic Arts, a leading interactive entertainment software developer, exclusive worldwide rights to create digital games based on a wide range of Hasbro's intellectual properties, such as Monopoly, Scrabble, Yahtzee, Nerf and Tonka.

Among other things, the relationship will help Hasbro develop a platform for social networking, similar to Barbiegirls.com.

"Their knowledge of the space, coupled with our knowledge of kids, is going to be very beneficial to us," Verrecchia said. While some aspects of the partnership are expected to yield a direct economic benefit, Hasbro also says it will help the company better understand what older kids who are actively engaged in social networking are interested in, he added.

During the third quarter, Hasbro spent $362.1 million to repurchase a total of 12.9 million shares of common stock, and says it has bought back roughly 40 million shares in total over the past couple years. It still has authorization to buy back an additional $240.6 million in stock, but will probably be less aggressive about buybacks in the future due to a decline in cash flow generation, CFO David Hargreaves said on the conference call.

The stock is currently trading at 15.1 times the consensus 2008 earnings estimate, or at roughly a 2% discount to the S&P 500, vs. its five-year average of a 3% discount, JPMorgan Chase & Co. (JPM) said in a research note on Oct. 22. (An affiliate of JPMorgan Securities received compensation for non-investment banking services within the past 12 months. JPMorgan has a neutral rating on the stock.)

"The company will continue to benefit if it is able to grow its core brand revenue as well as continue to execute on its cost cutting program," the note said.

But the company has a slightly weak track record for growing profits and faces fairly difficult comparisons this year, which could hamper growth in 2008, the note added.

Bogoslaw is a reporter for BusinessWeek's Investing channel .