2023-10-03 22:10:46 ET
Summary
- Hasbro's earnings have been released, showing a decline in revenue and net earnings compared to the previous year.
- I believe that the valuation of Hasbro's stock is too optimistic and does not recommend buying at current levels.
- The dividend yield has decreased and the opportunity cost of investing in the stock has increased, making the author less excited about the dividend.
In late May I announced to the world that I’m neither adding to, nor selling my position in Hasbro, Inc. ( HAS ), and in that time, the shares have returned about 6% against a gain of only about .7% for the S&P 500. The company has reported earnings yet again, so I thought I’d review the latest results, and compare them to the valuation to see if it makes sense to buy more, sell my position, or hold.
We’re all busy people, which is why I write a “thesis statement” at the beginning of each of my articles. This gives my readers the opportunity to understand my thinking about a given name quickly before they’re exposed to too much “Doyle mojo.” You’re welcome. Although I think the dividend is reasonably well covered, I think the valuation is way too optimistic at the moment. I don’t think it’s so egregious that it’s worth selling the stock, but I would certainly not add at current prices. Previously, the dividend yield was actually higher than the risk-free rate, and that has reversed as of now. The opportunity cost of employing capital in this stock, and many other stocks, has spiked higher along with risk-free yields. Finally, I think Wall Street’s forecasts for earnings growth make no sense here. For these reasons, I’m neither adding nor selling my stake in this business. If you have no exposure to Hasbro and are considering it, I would hold off until the price falls to more closely line up with value.
Financial Snapshot
The first six months of this year have been challenging relative to the same period a year ago. Revenue is down by nearly 12%, or $291 million, when compared to 2022. At the same time, though, the company has done a fairly good job keeping costs under control. Specifically, for the first six months of 2022, they came in at $2.163 billion, and during the first half of 2023, they were about $12.7 million lower, at $2.15 billion. The second quarter saw a $231.2 million impairment of goodwill to the film and television assets, driven by a challenging environment, most particularly the strike by the Writer’s Guild of America. This, in combination with the significant drop in revenue, is what caused net earnings to plummet by $460.3 million from the same period a year ago.
All that written, I’d suggest that the company is in some ways much stronger than it was in 2019, with revenues up by about 29% or $494 million. This is, in many ways, a much stronger company than what it was pre-pandemic. Additionally, although the company generated CFO per share of only about $.86, against the $1.40 in dividends paid. As I pointed out in my previous article on this name, though, I’m of the view that the dividend is secure, but I don’t expect much in the way of growth anytime soon. Feel free to check out that article for a more in-depth review of my thinking on this score. So I don’t think the yield is going to move much higher, but I think it’s decent enough in the 4.4% range. Given that, I’d be willing to add to my position at the right price.
Hasbro Financials (Hasbro investor relations)
The Stock
I've written it before, and I'm absolutely certain that I'll write it again. I may risk boring my readers, but if it isn't obvious to you by now, that's very obviously a risk I'm willing to take. The more you pay for $1 of future gains, the lower will be your subsequent returns. This is why I try my best to buy shares when they are cheaply priced. Put another way, there’s a strongly negative relationship between price paid and future returns. So, if you take nothing else from my articles, take the idea that you tend to do better when you buy shares cheaply. This approach has put me near enough the “top of the pack”, in spite of my many public investing failures .
I write this incessantly because I’ve frequently come across people who are of the view that "we don't buy stocks, we buy businesses." In my view, these poor souls have been fed some propaganda. I’m going to do my bit to try to dispel this nonsense by offering a thought experiment. Let’s consider the tale of two investors who bought Hasbro Inc. An investor who bought these shares on August 4th, just after the company announced its latest quarterly numbers and another who bought one month later. The former is down about .9%, while the latter, who bought only one month later, is down a whopping 13% since. There was not enough new information, and not enough happened at the firm to justify this massive return discrepancy. The difference in whether or not this was a “mediocre” or “bad” investment came down to price paid. The investor who paid the least did the relative best. Buy cheaply.
With that sermonizing out of the way, I should point out that I measure the cheapness of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I like to look at ratios of price to some measure of economic value, like earnings, free cash, book value, and the like. I like to see shares trading at a discount to both their own history and the overall market. When I last reviewed Hasbro, the PE was just under 70, price to sales was 1.47, and the dividend yield was 4.66%.
Fast-forward to the present, and the shares are actually between 6.5% and 9% more expensive than they were previously, and the dividend yield is now about 7% lower, per the following:
This doesn’t fill me with a great deal of joy, especially since the spread between the dividend yield and the risk-free rate has actually widened as the yield on Treasuries has risen by about 90 basis points since I last reviewed this name. So, the opportunity cost of risk capital has increased by about 23%. Put another way, a 4.66% dividend yield might be very attractive when the 10-year Note is yielding 3.8%. When the 10-year Note is yielding 4.767%, though, I get less excited by the same dividend that’s yielding 4.36%.
You may recall from earlier in the article when I pointed out that I measure the cheapness of a stock in a few ways. I like ratios, but I also want to try to work out what the market is "thinking" about a given investment. The way I do this is by employing methods described in books like Professor Stephen Penman's "Accounting for Value" and Mauboussin and Rappaport's "Expectations Investing." Each of these uses the stock price itself as a rich source of information. Penman, in particular, shows investors how they can employ a bit of high school algebra to isolate the "g" (growth) formula in a standard finance formula to work out what the market expects from a given company. Applying this way of thinking to Hasbro at the moment suggests the market is assuming that this company will grow earnings at a rate of about 3.5% from current levels. In fact, it seems that Wall Street is forecasting EPS of $4.12 this year, in spite of the fact that the first half of the year is saddled with a $1.86 loss. equally fancifully in my view, EPS is expected to grow at a rate of 21.4% from that level in 2024. That is excessively optimistic in my view. Given that I’m going to neither add to nor sell my stake here.
For further details see:
Hasbro Valuation Has Failed Its Saving Throw