1. Is the company undervalued?
EV/EBIT: 17.97
EV/Sales: 2.46
Price/Book: 4.11
Hasbro is a reasonably priced stock, which offers investors solid long term growth prospects. The company also sports high margins and returns capital back to shareholders. If management hits their growth targets, investors could achieve above market returns.
2. Can I easily explain what the company does?
Yes, Hasbro is in the entertainment experience business. They have 3 segments within their company; consumer products (toys), gaming, and TV/Film content.
3. Does the cash flow statement line up with income statement?
Yes, cashflows have been consistently higher than reported earnings:
Most of their excess cash went towards paying down debt, dividends paid out, and capital expenditures. My only concern here is the build up of inventories, which is up almost 40% YOY. This could potentially signal that demand is beginning to wane and forward estimates are way off. However management stated that in transit inventories at quarter end were the root cause. This has been a common talking point among other consumer product companies recently, so I’m willing to give $HAS the benefit of the doubt here.
4. Is the Balance Sheet Healthy?
Total Debt: $4.2B
Total Cash: 983M
Current Ratio: 1.52
Relative to their market cap, $HAS doesn’t hold much debt. Furthermore Hasbro paid $179M in net interest payments last year, compared to $763M in operating income. That’s over 4X coverage, which should improve as their debt has come down and profits are expected to rise. Not perfect, but $HAS gets a solid B in regards to balance sheet health.
5. How profitable is the business?
Gross Margins: 60.32%
Operating Margins: 13.58%
Net Margins: 6.68%
ROIC: 7.43%
There are things to like and dislike about $HAS profitability. For example, 60% gross margins are superb. Conversely net margins have been quite low, achieving no better than 11% historically. This is due to significant SG&A expenses, which sound like they’re not going away anytime soon. Notwithstanding operating margins have been fairly consistent and management thinks they can hit 16% EBIT margins long term. In summation $HAS is an above average business, but not by much!
6. What is the company’s growth potential?
10-yr Revenue CAGR: 4.1%
10-yr Operating Profit CAGR: 4.68%
10-yr FCF CAGR: 4.94%
The trailing data is probably understating $HAS long term growth prospects. For instance, gaming and content grew at 18% and 54% YOY respectively last quarter. Management is guiding for low double-digit growth in both of the aforementioned segments and mid-single digit growth in consumer products moving forward. For these reasons $HAS should grow at an above market rate for the foreseeable future.
7. Is management rewarding shareholders?
$HAS currently offers investors a 3.24% dividend. They also have a share repurchase plan in place, but don’t plan on buying back stock until the back half of 2023. I find it bizarre that management decided to give this information in their most recent press release. It comes across as a big-time empty gesture to shareholders. Furthermore, Hasbro only raised their dividend by 3%, which is slap in the face when you consider inflation is running at 8%. On top of this $HAS issued $98M in SBC last year, which means they only returned $277M on net back to shareholders. This equates to 2.2% total shareholder yield, which is rather unimpressive. Even with an expected increase in CAPEX next year, $HAS could be doing a lot more for shareholders given their strong free cash flow.
8. How does the company stack up against their peers?
Hasbro biggest competitor is Mattel Inc. $MAT
$MAT EV/SALES: 1.78
EV/EBIT: 12.27
Operating Margins: 13.37%
Candidly these two business models are different, but at the core both companies are toy manufacturers. With that said $MAT is cheaper than $HAS, but returns no capital back to shareholders and revenues have declined almost in a straight line for the last decade. Being a melting ice cube candidate, I would expect Mattel’s valuation to be much lower. For this reason I think $HAS is a significantly better risk adjusted bet.
9. What’s the counter argument?
Aside from the near term inflationary headwinds that every business is facing, 3 retailers comprise ~35% of Hasbro’s total sales. Additionally consumer preferences can change rapidly in the toy business.
I’m actually not too concerned about 1/3 of Hasbro’s revenues coming from 3 retailers. $HAS is diversifying their business and that number should shrink moving forward. Moreover there aren’t many competitors in the toy industry so it’s unlikely their distribution partners decide to play hardball.
Shifting consumer preferences is more of a concern for me. I could see a scenario where $HAS over invests into a product/category that kids no longer have interest in. Having said that the ball could just as easily bounce the other way. For example, $HAS could launch the next beanie baby craze. (Side note The Great Beanie Baby Bubble by Zac Bisonette is one of the best investing books ever). Frankly I’m not a toy expert, so it’s difficult for me to gauge one way or the other.
10. Is there something I think the market may be missing?
As mentioned previously Hasbro’s two business units; Gaming and Content are growing at a very high rate:
Additionally Hasbro has invested heavily into these categories, which is hampering profitability near term. This could inflect in the future and it wouldn’t be unreasonable to assume that earnings growth outpaces revenues over the next few years. Based on the current valuation I don’t think Mr. Market is pricing in 10% EBIT growth annually.
Final Thoughts:
My base case for $HAS would be EBIT growth of 8% annually, a 2.5% net shareholder yield, and an 18X EV/EBIT exit multiple in 5 years. This would equate to a ~10.5% expected return, which is about what the market does historically.
Furthermore I’m not in love with their business model. It strikes me as odd that a toy manufacturer would get involved in the gaming and movie industry. I could understand there being some tangential synergies with cross promotion. However $HAS is launching series like Yellowjackets, which is about a group of girls who survive a plane crash and fight off cannibals in order to survive. This is a far cry from My Little Pony and has literally nothing to do with their core business. In football there’s a saying; “If you have two quarterbacks, you actually have none”. Right now, Hasbro has three quarterbacks and I’m doubtful they achieve excellence with any one of them. In closing the stock would have to get considerably cheaper for me to consider buying.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice