INVESTMENT THESIS


Hasbro Inc. (NYSE: HAS). Internationally, we think the toy industry can grow, particularly in the Asia/Pacific region and emerging markets.
Reflecting the company’s strong 3Q revenue and earnings, we continue to view HAS shares as attractive for long-term growth-income investors, and are maintaining our five-year BUY rating.
RECENT DEVELOPMENTS


On October 26, Hasbro reported adjusted 3Q EPS of $1.88. The above-consensus earnings reflected higher-than-anticipated revenue and operating margins. Net revenue rose 13% from the prior year. The increase reflected improvement in the company’s Franchise Brands and Hasbro Gaming divisions, offset in part by weaker results in other businesses.
The cost of sales declined to 34.3% of revenue from 39.8% a year earlier. The share count rose by more than 10 million from the prior year, to 137 million.
By business segment, Franchise Brands reported sales of $808 million, up 4% year-over-year: The better-than-expected revenue reflected growth in MAGIC: THE GATHERING and Hasbro Gaming.
In Partner Brands, revenue fell 4% to $409 million. Hasbro Gaming revenue rose 3%, to $239 million, led by MAGIC: THE GATHERING and Monopoly.
Emerging Brands reported an 18% decrease in revenue, to $155 million. The consensus estimate had called for revenue of $153 million.
Entertainment, Licensing and Digital revenue fell 23% to $89 million, driven by the closure of BackFlip Studios.
Royalty expense rose $49 million to nearly $177 million. Selling, distribution and administrative costs rose to 18% of revenue from 17.5% a year earlier.
Going forward, we expect an increase in digital gaming licenses to benefit the operating margin.
In its 1Q20 earnings release, management withdrew its 2020 guidance.
As discussed in a previous note, in 2019, revenue rose 2.5% to $4.7 billion, and operating earnings rose to $4.07 from $3.85 per share. The adjusted operating margin was 14.2%.
FINANCIAL STRENGTH & DIVIDEND


Accounts receivable were up nearly $20 million, while inventory fell to $540 million. Inventories were 30% of revenue, and below the five-year range of 47%-65%.
In its 1Q20 earnings release in April, management reiterated its commitment to paying a dividend.
MANAGEMENT & RISKS


Brian Goldner has served as Hasbro’s chairman and CEO since May 2015. Hasbro’s two major shareholders own 25% of total shares outstanding, which could make it difficult for minority shareholders to implement change.
COMPANY DESCRIPTION


Hasbro is a major producer of toys and games, including digital games. Its leading brands include Nerf, My Little Pony, Monopoly, Transformers, Play Doh, Magic, The Gathering and Transformers. The company is also licensed to manufacture Star Wars, Jurassic Park and Marvel toys. On December 30, 2019, Hasbro completed its $4.0 billion acquisition of Entertainment One (LSE: ETO), which develops, produces and distributes entertainment content. With a market cap of approximately $10 billion, the shares are generally regarded as large-cap growth.
VALUATION


Our target, combined with the dividend, implies a potential total return of 15% from current levels.
On November 20 at midday, BUY-rated HAS traded at $92.07, up $0.32.
Source: Argus