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Electronic Arts Inc. (EA), Hasbro, Inc. (HAS): Picking From Among Right-Sizing Companies

Entertainment and recreation-oriented The Walt Disney Company (NYSE:DIS) and video game developer Electronic Arts Inc. (NASDAQ:EA) seem to have given a new twist to the aphorism “firing on all cylinders” lately. Theirs come in the sense of laying off a good number of employees, with hopes that the weight they shed in terms of manpower complement will lead to shareholder value improvement and draw more investors to their fold in the end.

Hasbro, Inc. (NASDAQ:HAS)Toymaker Hasbro, Inc. (NASDAQ:HAS) is another firm which has likewise been handing out pink slips. Last February, it announced a cost-reduction program entailing a 10% workforce reduction. The move followed a 6% drop in profit despite the holiday season, when toy sales were supposed to be brisk. Despite the manpower cut, Hasbro, Inc. (NASDAQ:HAS) made it to Fortune magazine’s 2013 “100 Best Companies to Work For” where the company was ranked No. 92 in the listing.

The Walt Disney Company (NYSE:DIS), meanwhile, affirmed its position among “America’s Most Admired Companies” in 2013 with a No. 9 ranking in this roster based also on a Fortune annual survey. Notably, this poll has a broader perspective, including corporate assets and people management, quality of products/services, and financial soundness; yardsticks that can very well serve as among the parameters for picking stock portfolio candidates- Electronic Arts Inc. (NASDAQ:EA) and likable employer Hasbro, Inc. (NASDAQ:HAS) included.

Selected key statistics Disney Electronic Arts Hasbro
Revenue (ttm) $42.84B $3.96B $4.09B
Quarterly revenue growth (y/y) 5.20% −13.10% −3.40%
Diluted EPS (ttm) 3.10 0.55 2.55
Quarterly earnings growth (y/y) −5.60% n/a −6.30%

ttm: trailing twelve months; y/y: year over year

Disney trimmed to fighting form

The key financial statistics above, culled from Yahoo! Finance, enable a better appreciation as to the rationale for Disney’s reported layoff of some 150 staff members in its movie studios. In contrast to gains in other company units, this segment’s revenues dropped 5% during the fiscal 2013 first quarter, and posted a 43% decline in operating income for the period, which in effect contributed to the lower earnings growth.

Earlier, The Walt Disney Company (NYSE:DIS) also announced “curtains down” for the LucasArts video games unit it acquired along with LucasFilm last year. LucasArts’ video game titles will instead be licensed to third parties for a more stable generation of earnings.

Where more exercises are needed

The double-digit decline in EA’s quarterly revenue growth needs much more than just the layoffs the company undertook. The sharper focus on new platforms and mobile applications- that Electronic Arts Inc. (NASDAQ:EA) said was the reason for its manpower reduction- also has to be accompanied with measures geared toward customer satisfaction.

Mainly because of several recent game flops, including the botched new edition of Sim City which reaped the ire of subscribers, EA  got tagged anew this year as the “Worst Company in America,” a title that the video game maker also had in 2012. The company, for certain, has to quickly find a suitable CEO to replace the resigned John Riccitiello, who took responsibility for the company’s failure to meet its recent financial goals. Until these deep-seated issues are resolved, any investing decision on Electronic Arts Inc. (NASDAQ:EA) is best left in the freezer.

For Hasbro, Inc. (NASDAQ:HAS), the seasonality of its toy-making business, and competition from mobile devices and techie entertainment gadgets, hamper growth in its earnings. Unless the company meets greater successes in diversifying into the lucrative and broader video game industry, it will lack the consistency that long-term investors want in their holdings.

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