Toy Story Grown-ups, take note: The lucrative toy market isn't just child's play.

The company: Hasbro Inc. is the second-largest toymanufacturer in the world, sharing industry control withBarbie purveyor Mattel Inc. The company markets its productsprimarily through its Playskool, Tonka, Kenner, Milton Bradley andParker Brothers brands.

The markets: Many of Hasbro's toys target5-to-14-year-olds, an age group the U.S. Census Bureau expects togrow by nearly 1 million by 2000.

Increasingly, purchasing power has become concentrated in thehands of several large retail chains, notably Toys "R"Us, Wal- Mart, Kmart and Target. Because of these companies'purchasing and marketing strategies, larger toy manufacturers thatcan offer broad product lines, high advertising budgets andfrequent deliveries have been favorably affected.

The sizzle: Hasbro recently made some long-awaited movesto restructure its operations and improve shareholder return. Thatshould help the company realize $40 million in savings. The companyalso retains one of only two licenses to sell "Star Wars"merchandise. With the first movie of the second trilogy set forrelease next year, this license should result in healthy revenuestreams in the future.

The risks: Unfortunately, the only true experts in thetoy business are knee high, and overall profitability heavilydepends on the third and fourth calendar quarters.

The toy business is relatively stable, growing at a compoundaverage rate of 6 percent annually. Any of the benefits gained fromthe overall stability of the business, however, are negated by therisks associated with owning a company in the midst of majorchanges.

Historical financial performance: Over the past fiveyears, Hasbro has delivered a meager compound annual return of 8.5percent to shareholders, compared with Mattel's return of 24percent over the same period. This performance, along withmanagement's rejection of a takeover bid from Mattel in 1996,forced Hasbro to implement restructuring plans.

Projected financial performance: Hasbro trades at a 20percent discount to S&P 500 companies and Mattel. Assuming amodest $30 million cut in operating costs in 1998 and a 4 percentreduction in outstanding shares, Hasbro can expect to see anearnings growth of at least 10 percent this year. If the companyachieves 12 percent or higher EPS growth due to the major productpush it's planning in conjunction with the upcoming movie"Small Soldiers" and keeps its cash growing, there'sa good chance investors will reward it with a slightly higher P/Emultiple, which currently stands at 15 times forward earnings.Growth is also contingent on Hasbro's successful execution ofits restructuring plans. Combined with EPS growth and slightlyexpanded multiple-to-operating earnings in the 22 to 23 range, theshares may advance from 15 percent to 30 percent in the coming year(from a current price of $35.25). The target price this year shouldbe in the $35-to-$40 range.

The Motley Fool can be found on the Web at http://www.fool.com and on AOL atkeyword: FOOL. Alexander Schay contributed to this article. Theabove opinions are those of the authors and not of BIZ Experiences.Past performance is no guarantee of future results.

At A Glance

Name: Hasbro Inc.
Recent Price: $35.25
Price/earnings ratio: 17
Market: AMEX
Symbol: HAS

The Outlook

Past and projected sales and earnings.

1995
Revenues ($M): $2858
Net Income ($M): $155
Earnings per share: $1.18

1996
Revenues ($M): $3002
Net Income ($M): $199
Earnings per share: $1.52

1997
Revenues ($M): $3188
Net Income ($M): $135
Earnings per share: $1.05

1998 (estimated)
Revenues ($M): $3510
Net Income ($M): $217
Earnings per share: $1.98