2023-03-07 04:08:59 ET
Summary
- Hasbro is a leading global toy manufacturer responsible for some of the most iconic and popular brands and products.
- A fundamentally solid business model seems to have been ignored due to poor FY22 results.
- Current macroeconomic conditions remain difficult for the toy maker as consumer spending slows.
- 41% drop in share prices has left the company trading at a significant undervaluation.
- A strong deep value proposition combined with a good business warrants a Strong Buy recommendation.
Investment Thesis
Hasbro ( HAS ) is one of the world's largest toy manufacturers. Over the past century the company has acquired some of the largest brands and names in the toy industry.
This has allowed the company to develop an almost irreplicable portfolio of products which targets consumers across multiple demographics and market segments. The result is a strong business with a reasonably robust economic moat.
While the last year has been quite unimpressive due to a weak consumer discretionary market and difficult macroeconomic conditions, Hasbro's fundamental revenue streams should remain unaffected in the long-term.
When combined with a holistic strategic plan and a streamlining of their operations structure, the future looks like it could be quite positive indeed.
Therefore, a fundamental business analysis combined with an intrinsic valuation is necessary to determine whether or not the potential exists for value-oriented investors to extract returns from Hasbro's shares.
Company Background
Hasbro Homepage
Hasbro is an American MNC conglomerate headquartered in Pawtucket, Rhode Island. The company owns some of the largest toy brands in the world including Milton Bradley, Parker Brothers and Wizards of The Coast.
The company was founded 100 years ago and continues to be one of the largest toy manufacturers in the world. Their portfolio of products includes huge franchises such as Star Wars, Marvel, Transformers, Furby, Nerf My Little Pony and even Peppa Pig.
Their immense scale and huge portfolio of brands has left the company with a significant set of valuable tangible and intangible assets. While their primary competitor Mattel ( MAT ) is a slightly smaller company, the incredibly competitive nature of the toy industry means Hasbro must continue to innovate and maintain a relevant portfolio of products to attract new customers.
The last year has proven incredibly difficult for the company with unfavorable macroeconomic headwinds combined with a difficult FX environment resulting in a 41% drop in the company's stock.
However, the recent announcement to selloff their only just acquired TV brand eOne along with other efficiency focused business improvement suggests significant future profit generation potential is in store for the toy maker.
Economic Moat - In Depth Analysis
Hasbro Shop
Hasbro has one of the strongest moats of any company operating within the toy industry. The core constituents of their moat are their significant licensing and franchise agreements combined with a truly diversified toy portfolio.
Through lucrative third-party licensing agreements, Hasbro is able to directly benefit from the popularity of many different TV series, movies or fictional universes by manufacturing and selling toys associated with these brands.
In January of 2022, Hasbro extended their licensing relationship with Lucasfilm (a subsidiary of Disney) granting the toymaker rights to produce and sell Star Wars toys. The deal also made provisions for Hasbro to manufacture toys for the newly revived Indiana Jones franchise too.
The Star Wars universe has seen a huge boost in popularity since the franchises acquisition by Disney and the franchise is now worth over $ 65B . The ability for Hasbro to tap into this franchise provides the company with a huge stream of consistent and predictable sales with significant revenues coinciding with new film and series releases.
The company also holds rights with Disney for the Marvel franchise, another huge fictional universe which provides Hasbro with a huge variety of characters, vehicles and objects to transform into toys for consumers.
These lucrative licensing agreements illustrate that Hasbro's management team is acutely aware of the potential and importance of popular franchise agreements. By securing licensing agreements to manufacture toys licensed under the most popular pop-culture themes, Hasbro is able to harness significant sales and target new demographics of consumers.
While their third-party licensing agreements are outstanding and deserve praise, the value of their own in-house toy brands and franchises should not be discounted. Holding over 1500 brands including global household names such as Monopoly, My Little Pony and Nerf, the company's portfolio of toys is incredibly diverse and established.
Hasbro's 1999 acquisition of Wizards of The Coast expanded the company's portfolio of products to include the hugely popular fantasy card game Magic: The Gathering. In February of 2023, the company reported that Magic: The Gathering alone had generated over $ 1B in revenues.
The rapid growth of Magic has led to a player-base of over 50 million illustrating the huge scale to which Hasbro has managed to develop the turn-based card game. The brand also provides significant diversification to Hasbro's consumer demographics as it targets a primarily older and more mature segment of consumer.
It is through this huge diversification of brands that Hasbro has managed to grow into a true toy industry juggernaut. By targeting a vast segment of consumers, the company is able to increase the stability of its revenue streams.
Furthermore, the firm's strategy to produce a wide variety of products allows for increased exposure to the fastest growing segments with the ability for Hasbro to scale production quickly and effectively.
Hasbro still owns Entertainment One, a TV brand which the company acquired in 2019 with the plan to produce digital content for their various brands of toys. However, Hasbro has now placed eOne up for sale as the company has realized that outsourcing content creation is more cost-effective than producing it in-house. Therefore, this business segment provides little moat for the company.
Overall, the company harbors a significant economic moat within the toy industry thanks to their unrivalled scale and licensing agreements. I believe it would be very difficult for any competitor to achieve the scale of production or disrupt Hasbro's licensing agreements in the short to-mid term future.
Even in the long-term, I believe the company holds a robust economic moat thanks to their proactive and innovative mindset which should ensure Hasbro's toys remain relevant and popular in years to come.
Financial Situation
Hasbro has been a relatively profitable firm for the greater part of their existence. Their consistent EBIDTA margins of 18.46% combined with a 5Y average ROIC of 8.15% while not outstanding, are still quite healthy from a profitability perspective.
In FY22, Hasbro generated $ 5.86B in net revenue. This represents a 9% (6% constant currency basis) decrease compared to FY21 which is an unfortunate consequence of the difficult and persisting macroeconomic headwinds facing the U.S. economy as a whole.
Net earnings fell 53% down to just $203M for the entire FY22. Operating profits fell over 100% in Q4 FY22 compared to the same period in FY21 from $171M gain to a $125M loss.
While disappointing, the incredibly cyclical and sensitive nature of the toy industry in which Hasbro operates means these results are not particularly alarming given the inflationary environment in which the global economy finds itself today.
The particularly weak Q4 results - a period in which sales are traditionally bolstered by a strong Christmas season - were the result of decrease consumer spending around the holidays due to a decrease in many households purchasing power.
All of Hasbro's brands experienced a decrease in net revenues for FY22 varying from -4% for their franchised brands down to -17% for their TV/Film/Entertainment branch.
Interestingly, the only 4% decrease in franchised brand revenues illustrates the aforementioned strength and profitability of this business strategy.
By continuing to focus on bigger and more lucrative franchise agreements, Hasbro should be able to build a more profitable and robust set of core revenue streams. This should produce significantly increased potential for investor value generation.
Hasbro was also quick to illustrate the strength of their Magic: The Gathering brand which showed a 40% increase in net revenues for Q4 in FY22 compared to the previous year. For the entire year, Magic generated $1.07B in revenue representing a 7% increase compared to FY21.
The company also highlights that their Peppa Pig and Play-Doh brands were strong performers in 2022 along with their Star Wars, Marvel and Nerf products.
During FY22, Hasbro reported their operating expenses increased 2% as a percentage of net revenues compared to FY21. A significant increase of 11.3% in their Selling, Distribution and Administration costs was also reported .
A significant portion of the increase in Selling, Distribution and Administration was due to a $300.3M partial impairment of the company's Power Ranger's assets recorded under this segment . The company also reported that significant severance and employee charges contributed to the increase in this segment as a result of Hasbro's new "Operational Excellence" program.
This program involves a 15% reduction (approximately 1000 workers) in global full-time employees. These layoffs should assist the company to streamline their operations structure to ensure improved future profitability and to increase the rate of value returns to shareholders.
The operational excellence program is a cost-savings initiative which forms part of their Blueprint 2.0 transformation which is an overarching corporate strategy aimed at strengthening the company's core brands while eliminating financially unviable elements of the firm's operations.
Blueprint 2.0 is a consumer-centric framework where Hasbro's brands are transformed as story-led and play-led consumer franchises brought to life through games, play and experiences and offered across a multitude of platforms and media.
This pivot to a more interactive and digitally immersive play experience is an innovative move from the toy maker which should see an increase in the popularity of many of their ageing brands and franchises.
Seeking Alpha | HAS | Profitability
Seeking Alpha's Quant assigns Hasbro with a "B+" Profitability rating which I am inclined to largely agree with. Their reasonable profitability metrics provide the company with a good footing to begin building a stronger and more exciting financial future.
Hasbro's balance sheets look to be in healthy shape. Their total current assets for FY22 are $2.9B while total current liabilities for the same period amount to just $2.18B. This leaves the firm with a great debt/equity ratio of 1.41.
Their quick ratio (current assets minus inventory divided by current liabilities) is just 0.74.
These fiscal stability metrics illustrate the healthy status of Hasbro's balance sheets. S&P affirms Hasbro rates a BBB Local Currency LT Credit rating. Fitch affirms Hasbro's Long-Term IDR at 'BBB-. The outlook is stable.
Hasbro's total long-term debt amounts to just $3.85B. This is welcomed news for investors and illustrates the conservative style the firm's management has applied in their financial planning.
Furthermore, the debt has been financed very strategically leaving a large majority to be maturing around 2024-2040. Furthermore, the use of fixed rates for most of their notes means Hasbro is less directly affected by rising interest rates than many other firms.
Overall, it is safe to say that from a long-term perspective, Hasbro has a solid platform upon which they can build their business. Their strategic plans to increase exposure to franchise brands and reduce operational inefficiencies should yield significant improvements in their operations.
While short-term headwinds as a result of a regrettable macroeconomic condition are less than ideal, their long-term position as a market leader in the toy industry is undeniable.
Valuation
Seeking Alpha | HAS | Valuation
Seeking Alpha's Quant has assigned Hasbro with a "B" Valuation rating. I am largely inclined to agree with this rating, although I believe there is perhaps an even greater deep-value proposition present.
The firm is currently trading at a FWD P/E GAAP ratio of 13.64 and a FWD P/CF ratio of 10.63. Their FWD Price/Book ratio is just at 2.83 and the company's EV/Sales FWD is only 1.99. While these valuation metrics suggest the company is somewhere between fairly and undervalued, I don't believe the full story is being told.
From an absolute perspective, Hasbro's shares have fallen a whopping 41% over the last year significantly underperforming the rest of the U.S. stock market. From being valued around $100/share in mid-2022, the company's stock now trades for just $55.
Investors reacted to weakening results in FY22 which led to the decline in the company's share prices. However, from a fundamental perspective analyzing the company in mid-2022 and now, the company has only improved their profitability and business model.
This suggests the current price is perhaps irrational and potentially in a place to yield deep-value investors with a compelling choice.
By accomplishing a simple financial valuation based on the calculation below and using an EPS of $4.07, an ultra-conservative r value of 0.06 (6%) and the current Moody's Seasoned AAA Corporate Bond Yield, we can derive an IV for Hasbro of $80.50.
Even with this ultra-conservative CAGR value for r, Hasbro appears to be intrinsically undervalued by about 30% (given a current share price $55). Furthermore, when using a marginally more optimistic CAGR value of 0.08 (8%), we see an undervaluation of 42% with an implied intrinsic value of $96.00.
The Value Corner
Therefore, I believe Hasbro presents a compelling deep-value proposition for investors looking at timeframe of around 2-4 years.
In the short term (3-10 months) it is difficult to say exactly what the stock will do. I believe the stock may begin to exhibit some bearish tendencies moving towards the midpoint of FY23, simply due to the prevailing theme of a recession later in the year. A drop in valuations in the short-term could absolutely be a possibility.
In the long term (2-5 years) I fully expect their position as a leader in the industry to become even stronger. The significant undervaluation presents real value to investors and access to a high-quality business at a great price. While the company is not exceptional, their robust profitability, strong fundamentals and outstanding valuation is.
Entering into a position in the stock from a deep-value perspective is currently a possibility in my opinion. The extensive undervaluation present provides potential for great returns along with plenty of margin of safety.
Risks Facing Hasbro
The primary risk facing Hasbro is the possibility for failed execution of franchising agreements and the increasing move towards a digitally-oriented play space.
While the company currently has some of the biggest and most popular licensing agreements for toys in its portfolio, this is not guaranteed in the future. Management must remain proactive in negotiating contract extensions to existing partnerships while ensuring new and emerging brands are analyzed and evaluated accurately.
Equally, the potential for a failed execution or poorly managed licensing agreement (particularly as the company is looking to increase exposure to these brands) presents the threat of poor shareholder returns and fiscal performance.
The rapidly increasing presence of digital media, games and content is also a threat to Hasbro. While the company has identified a rapid increase in digital games as being paramount to the success of their Blueprint 2.0 strategy, they must succeed in its execution.
Significantly more established digital-content and video game companies make entering this space difficult for Hasbro. While the move towards outsourcing content-creation to third-parties is a cost-effective solution, there is increased potential for botched execution or a poorly managed operation.
From an ESG perspective, there is relatively little to negatively affect Hasbro. In fact, Hasbro was named by JUST Capital as being one of the most JUST companies in the U.S. in 2022.
The Rankings are the only comprehensive evaluation of how the nation's largest corporations perform on the issues that matter most to Americans today across five stakeholders: workers, communities, customers, shareholders & governance, and the environment.
This illustrates Hasbro's positive corporate culture and illustrates the paramount importance management has placed on ensuring the company has a beneficial effect to all stakeholders involved in their operations.
Summary
Hasbro is a solid business with reliable revenue streams. Their continued efforts to further diversify their operations while consolidating financially ineffective elements of their business should allow the company to become even more profitable in the future.
In my opinion, current share prices represent a significant undervaluation in the company from an intrinsic value perspective. The promise of strong future cashflows and a truly diverse set of revenue streams suggests significant returns could be on the horizon for Hasbro.
As a short-term investment, I believe there is some volatility in-store for the stock as tricky macroeconomic conditions continue to dominate the marketplace. However, in the long-term I believe their undeniable position as a market leader places Hasbro firmly in position to generate great shareholder value.
I therefore believe Hasbro warrants a Strong Buy rating, thanks to the significant intrinsic undervaluation present in the company's shares.
For further details see:
Hasbro: Good Business At An Amazing Price