TOY SALES DROP

off after Christmas, but the same can't be said of shares of toy makers. According to my own not-quite-scientific study of

Hasbro

Right now might be an especially good time to consider a purchase of Hasbro shares. Wall Street is decidedly down on the nation's No. 2 toy maker's stock; eight of 10 analysts who cover it give it a Hold rating. Shares have lost 15% since summer. They trade at just 13 times forecast 2007 earnings, a discount of about a quarter to the S&P 500. Yet the main worry surrounding Hasbro seems to be that its 2007 performance was so strong that it will be difficult to improve upon in 2008. That's hardly a reason to abandon the shares, particularly since Hasbro seems stronger, more stable and more profitable than it has been in more than a decade.

Sales for Hasbro are seen surging 20% to $3.77 billion this year. That's still lower than the company's record of $4.2 billion, set in 1999. But 2007 profits are expected to total a record $318 million, well higher than the $189 million the company earned in 1999. Over the past four years the company has reduced its dependency on short-lived toy lines and breathed new life into longstanding ones. Furby and Pokemon, which led results in 1999, also led the sales plunge that followed. In 2007, results were helped by the box-office and toy-store success of "Transformers" and "Spider-Man 3." But ignore those lines and overall sales still grew more than 9%, analysts say. Management has used entertainment licenses to freshen up longstanding brands: Spider-Man lends his likeness to both an Operation board game and a Nerf football, while the Simpsons are featured in a version of Clue. ("Was it Bart with a poisoned doughnut at the Kwik-E Mart?") The company has also updated Star Wars toys yearly, even without new movies.

That's not to say sales won't dip in 2008. They're forecast to do so by 1%. Transformers and Spider-Man 3 toys did, after all, make up an estimated 20% of the total take this year. Neither "Iron Man" nor "The Hulk," both of which hit theaters in 2008, sell toys as well as Spider-Man. And it's perhaps hard to imagine that "Clone Wars" will be as big as "Star Wars" when the animated one-off debuts in theaters in August. But there are promising signs. A new Transformers television cartoon in 2008 should keep the plastic robots moving. A deal with Electronic Arts to produce videogames using Hasbro licenses should allow the company to recapture some sales dollars that have migrated from the toy chest to the television. And 2007 results were spurred in part from soaring demand overseas, created in turn by the weakness of the dollar. That trend looks likely to continue into 2008.

Hasbro, meanwhile, generates plentiful cash and spends it wisely. This year the company should clear $485 million. Since 2001, it has reduced debt by $570 million and spent $1.3 billion to reduce its share count, thereby making remaining shares more valuable. With debt expected to close the year at a modest 30% of total capital, and free cash flow seen topping $400 million through 2009, more share repurchases seem likely. Next year's anticipated stall in sales and profit growth notwithstanding, Wall Street expects earnings per share for the company to increase 10% annually, on average, over the next five years a handsome rate, considering the aforementioned low price/earnings ratio.

Those numbers earned Hasbro a recent appearance in a search for promising midcaps, or companies whose outstanding shares can be bought in their entirety for between $1 billion and $5 billion. Have a look at the screen recipe for details on the demands and use SmartMoney's stock screener to run the search for yourself anytime. Seven other companies recently made the cut.