Hasbro, Inc. Is Just Another Overvalued Toy Stock

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HAS - Hasbro, Inc. Is Just Another Overvalued Toy Stock

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In September 2017, the retail world was shaken by one of its biggest bankruptcies yet when struggling toy-retailer Toys“R”Us, Inc. filed for Chapter 11 bankruptcy.

Ever since then, toy stocks have struggled. Hasbro, Inc. (NASDAQ:HAS) is roughly 30% off its 52-week highs, while Mattel, Inc. (NASDAQ:MAT) is more than 45% off its 52-week highs.

Unfortunately, there is no turnaround in sight for these struggling toy stocks.

Hasbro stock may perform better than Mattel stock. But, ultimately, both of these stock will grind lower until the operational outlook in the toy industry improves. I don’t see that outlook inflecting upward any time soon and, as a result, I don’t think Hasbro stock will head higher any time soon.

Here’s a deeper look:

Troubled Times for Toy Stocks

HAS is the best in class when it comes to toy stocks, but these are just tough times for anyone in the traditional toy industry.

Hasbro draws roughly 14% of its sales from Toys R Us. Thus, the Toys R Us bankruptcy provides a serious near-term headwind to the company’s financials.

Bulls will argue that lost business from Toys R Us is just near-term noise and that, eventually, those sales will be recouped through other channels. But I’m not so sure about that. Toys in general seem to be on their way out.

At the core of this issue is a boom in internet and smart device usage among children. The average age for a child getting their first smartphone is now 10.3 years, so that means that all those 10-year-olds that were playing with Hasbro action figures are now playing on smartphones. Plus, tablet usage among children has soared from 26% to 55% over the past several years, while internet usage has soared from 42% to 64%.

In other words, children aren’t playing with HAS toys anymore. Instead, they are playing on smart tablets and smartphones. This trend won’t slow any time soon. Indeed, things may only get worse for HAS as technology continues to grow in popularity.

Hasbro Stock Is Overvalued

The aforementioned Toys R Us headwind will weigh on near-term numbers, while the technology headwind will weigh on long-term numbers. All together, over the next several years, Hasbro will be lucky to report positive revenue growth. At best, this is a 0-5% revenue growth story.

Margins have struggled lately thanks to slow top-line growth. The company is having to spend more on advertising in order to compete for relevance in the children’s entertainment category, which has become increasingly crowded over the past several years. This trend won’t reverse anytime soon. Thus, margins should be under pressure from increased ad spend.

But margins could grow thanks to the company’s strong partnerships with Netflix, Inc. (NASDAQ:NFLX) and Walt Disney Co (NYSE:DIS). Those partnerships bring in high-margin dollars and, over the next several years, those high-margin revenue streams should be the big drivers.

Thus, operating margins could trend from today’s depressed 15.6% base to 16-20% over the next 5 years.

A 2.5% revenue growth rate would put revenues at $5.9 billion in 5 years. An 18% operating margin implies just under $1.1 billion in operating profits. Taking out $50 million for net interest expense, 20% for taxes, and dividing by 125 million shares, that equates to roughly $6.50 in earnings per share in 5 years.

A market-average forward multiple of 16 on those $6.50 earnings implies a four-year forward price target of $104. Discounted back by 10% per year, that equates to a present value of just over $70.

Bottom Line on HAS Stock

The fundamentals aren’t great. They are actually bad. And they aren’t getting any better.

Meanwhile, Hasbro stock isn’t terribly cheap. And it definitely isn’t cheap enough if things stay bad.

Because of this, I don’t think HAS stock rallies any time soon. The downtrend in this stock should persist until the stock is more reasonably valued around $70.

As of this writing, Luke Lango was long DIS. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/hasbro-has-overvalued-toy-stock/.

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