HAS - Buying More Hasbro

2023-11-07 04:42:00 ET

Summary

• Hasbro shares have dropped about 25% in the past month, making it a potentially less risky investment.
• The company's financial performance has been soft, but the dividend remains relatively secure and has a higher yield than the risk-free rate.
• HAS stock is trading at a near decade-low valuation, making it a potentially attractive investment with potential returns worth the associated risks.

It’s been only about a month since I wrote my negative piece on Hasbro ( HAS ), and in that time the shares are down about 25% against a gain of about 3% for the S&P 500. I have a relatively small position in the stock but, given the price drop, I feel compelled to review the name yet again, because obviously a stock priced at $46 is a less risky investment than the same stock when it’s priced at $63. I want to review the financial results, and the valuation to see if the shares are reasonably priced at the moment. Additionally, I want to compare this stock to the risk free rate, because, once again, we’re not seeking “returns”, we’re seeking “risk adjusted” returns.

My articles each come with a “thesis statement” because I know that reading 1,250 words of text can be tiring, and reading 1,250 words of my text can be particularly tiring. Given that, I offer a thesis statement paragraph at the beginning of each of my articles that offers you the “gist” of my thinking. I think the financial performance has been soft relative to the same period last year, in spite of the company’s heroic efforts at cost control. That written, I think the dividend remains relatively secure. Since the shares have dropped in price, the dividend yield is now significantly higher than the risk free rate. Given that, the stockholder will receive about 32% more cash than the Treasury Note holder over the next decade assuming zero growth in the dividend. The dividend has grown at a CAGR of about 9% over the past decade. I don’t expect that growth rate to continue, but I think it reasonable to expect some growth in the dividend. Additionally, the stock is trading at a near decade low valuation. To my way of thinking the potential returns are worth the risks associated with investing at this point. Given that, I’ll be adding to my position as soon as the market opens.

Financial Snapshot

To refresh your collective memories, in my most recent article, I lamented the fact that the first six months of this year have been rather soft compared to the same period a year ago. A host of factors conspired to drop net income by about $460.3 million in 2023 relative to 2022. That written, I also pointed out that things are much better now than they were in 2019. I also suggested my view that the dividend was secure, but was not likely to rise much from current levels.

Looking at the 9 month results, and the stock price drop makes more sense in my estimation. Revenue was about 11% lower, and net income has cratered relative to the same time in 2022, down fully $759.8 million. Even more distressingly, it’s worse than 2019 by $681.3 million. Now, a more generously minded person than me would say that much of the drop in operating profit and net income can be attributed to the $450 million uptick in loss on assets held for sale, and $231 million in impairment of goodwill. That’s a fine argument as far as it goes, but we should remember that impairments, and losses are still just that: losses.

Finally, in fairness to management, they have done a very good job of controlling costs in the teeth of slowing demand. the company’s cost cutting efforts this year are very good in my estimation. While revenue is down dramatically, total operating costs are down about 7.5% from the same period a year ago, with “cost of sales”, “program cost amortization”, and “royalties” down dramatically by 15%, 11%, and 11.8% respectively. Additionally, cash from operations were up about 27% from the same time last year, and cash actually drives dividends and their sustainability. Given that, I’d be happy to buy more if, as a game show tag line once opined, “the price is right.”

The Stock

If you read me regularly, you know that I attempt to buy stocks when they’re on sale because I think cheap stocks represent a great combination of lower risk and higher potential return. They’re lower risk because much of the bad news has already been wrung out of price. They offer potentially higher returns because any surprisingly good news that happens at a “dog” may drive the shares higher quickly. So far this strategy seems to have worked out pretty well . If you read me regularly, you know that I measure cheapness in a few ways, ranging from the simple to the more complex. On the simple side, I look at the ratio of price to some measure of economic value, like earnings, sales, free cash flow, and the like. Ideally, I want to see a stock trading at a discount to both its own history and the overall market.

To refresh your collective memories, in my previous article on this name, I clutched my proverbial pearls over the fact that the PE, PS ratios were 74.2 and 1.6 respectively. The excessive PE was obviously caused by the write-downs etc., so that may get a “pass”, but I thought it unwise for the market to pay 1.6 times sales for a company that was obviously going through a soft patch. Additionally, the dividend yield at the time was only about 4.36%. Fast forward to the present and here’s the lay of the land at the moment.

Source: YCharts

Source: YCharts

It seems that the PE hasn’t moved much, but at least the PS ratio is about 26% cheaper as you’d expect from the price drop. Additionally, it’s very near a decade low, which is encouraging in my view. Finally, it’s worth noting that the dividend yield is up nicely by about 40%, per the following:

Source: YCharts

Unlike my last visit to this company, shareholders are actually receiving a positive risk premium of about 146 basis points . The question is whether or not that is a sufficient risk premium to uptick on the stock. I think a necessary exercise is to actually compare the cash flows received by a stockholder and a Treasury Note holder over the next decade to make this comparison. Thankfully, that’s exactly what I’ve done, and I’ve compiled the results in a table, and I present it below for your reading pleasure.

Leaving discounting and tax implications aside, over a 10 year period, a stockholder will receive about 31.5% more cash than will the Treasury Note buyer. That assumes zero growth in the dividend, which may be considered a conservative assumption given that the dividend has grown at a CAGR of about 9% over the past decade.

Everyone’s risk tolerances are different, obviously, but I’m comfortable buying, given the above cash flows. I think there’s some chance that a Treasury Note is going to generate a capital gain, but more than 32% excess cash is “nothing to sneeze at” as the young people say. Also, I think the thing that will drive Treasuries higher is falling interest rates. If rates fall, the relative attractiveness of a 6% dividend yield will become apparent, which should buoy the stock further. There’s certainly risk here, but I think you could do worse than buying this stock when it’s trading near a decade low price to sales multiple. Given the above, I’ll be adding to my position when the market opens.

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